A non hedged, cash sale of soybeans will likely be a better marketing alternative than using futures contracts if the cash price of soybeans

A non hedged, cash sale of soybeans will likely be a better marketing alternative than using futures contracts if the cash price of soybeans

• A. increases a lot
• B. decreases
• C. remains the same
• D. becomes volatile

Answer: (A)

When cash prices are expected to rise sharply, selling soybeans on the spot market lets you capture the higher price immediately, while a futures hedge tends to cap your upside. Hedging with futures for a producer usually involves shorting futures to lock in a selling price; if the cash price jumps, the futures price also rises and you incur losses on the futures position that offset some or all of the gains from selling cash. So you miss part of the upside by locking in a price that doesn’t reflect the later higher cash market. Keeping the sale unhedged means you keep the full benefit of the higher cash price. Hedging makes more sense when prices are uncertain or expected to fall, since it protects against downside, but not when you want to maximize a strong price increase.

When cash prices are expected to rise sharply, selling soybeans on the spot market lets you capture the higher price immediately, while a futures hedge tends to cap your upside. Hedging with futures for a producer usually involves shorting futures to lock in a selling price; if the cash price jumps, the futures price also rises and you incur losses on the futures position that offset some or all of the gains from selling cash. So you miss part of the upside by locking in a price that doesn’t reflect the later higher cash market. Keeping the sale unhedged means you keep the full benefit of the higher cash price. Hedging makes more sense when prices are uncertain or expected to fall, since it protects against downside, but not when you want to maximize a strong price increase.