Learn about the two methods that are commonly used by farmers and ranchers to market commodities and manage risk in this video from Market to Market Classroom. Agriculture production is full of risk. In any year, growers can face weather perils that include droughts and floods. Even when producers escape those extremes, conditions must be favorable at key periods during planting, growing, and harvesting. And even after crops are grown and harvested, producers still encounter risk. Changes in consumer demand, unforeseen international events, costs for fuel, and other circumstances can all influence profit. But the greatest risk of all may not be associated with producing commodities, but in marketing, or selling, them for a profit. Two methods that are commonly used to market commodities are cash marketing and forward contracting.
Cash marketing takes place when a farmer sells his commodity for cash. A trade on the cash market always involves transfer of the actual commodity.The farmer delivers their grain to the elevator after harvest or from storage, and receives the current price. The farmer's primary risk is if prices move lower while holding the commodity, he or she will have missed the opportunity to sell at the higher price.
A forward contract is a way to minimize the risk that the price of a commodity might go down before a farmer sells. A forward contract is an agreement to deliver a specific amount of a specific commodity at a specific time in the future. Because no one really knows whether prices will go up or down, a forward contract "locks-in" a price that is higher than the current cash price.
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