Farm Finance · September 2025 · 6 min read
Commodity futures offer farmers a way to lock in prices months before harvest, reducing the uncertainty that makes financial planning difficult. Understanding how futures contracts work, including margin requirements and basis risk, is the first step toward using these markets effectively. This guide covers the fundamentals every farmer should know.
A futures contract is a standardized agreement to buy or sell a commodity at a set price on a future date. Corn contracts on the CME represent 5,000 bushels, while soybeans are also 5,000 bushels and wheat is 5,000 bushels. To open a position, you deposit an initial margin—typically 5–10% of contract value—with your broker.
Margin accounts are marked to market daily, and you may receive margin calls if the market moves against your position. This is a cash flow consideration that must be planned for.
Farmers typically hedge by selling futures contracts against their expected production. This "short hedge" locks in a price floor. If cash prices fall, the gain on your futures position offsets the lower selling price. If prices rise, your futures loss is offset by higher cash prices at the elevator.
The difference between your local cash price and the futures price is called basis. Basis varies by location and time of year and is the primary risk remaining after hedging. Track local basis patterns over several years to improve your pricing decisions.
Put options give you the right, but not the obligation, to sell at a set price. They provide downside price protection while allowing you to benefit if prices rise. The cost of this flexibility is the option premium. Futures provide a more certain price but eliminate upside potential.
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Try the Profit CalculatorChoose a commodity broker who specializes in agricultural hedging rather than general futures trading. A good ag broker helps you develop a marketing plan tied to your cost of production and can explain basis patterns in your region. Most farmers start by hedging a portion of expected production—often 25–50%—rather than their entire crop.