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Using Cash, Futures, and Options Contracts in the Farm Business

Author

Listed:
  • Heifner, Richard G.
  • Wright, Bruce H.
  • Plato, Gerald E.

Abstract

A contract is an agreement between a buyer and a seller that specifies terms for future delivery of and payment for a product, asset, or service. Contracting enables farmers to reduce income uncertainty by assuring prices and outlets for their crops and livestock before the products are actually delivered. This report describes some of the contracting alternatives available to farmers, the factors to be considered in choosing among the different types of contracts, and the major advantages and disadvantages of each alternative. For example, the contracts most widely used by farmers are with local buyers. Such contracts assure farmers' outlets and set conditions for delivery. Some farmers use the highly standardized contracts traded on futures exchanges to temporarily set approximate prices for their products or inputs, pending actual sales to or purchases from local merchants or processors. Commodity options contracts, which are also highly standardized and traded on exchanges, can be used to set approximate lower or upper bounds on prices for commodities to be sold or bought later. The farmer's choice of contracts depends on the commodities produced or used as inputs, and the farmer's financial situation and risk preferences.

Suggested Citation

  • Heifner, Richard G. & Wright, Bruce H. & Plato, Gerald E., 1993. "Using Cash, Futures, and Options Contracts in the Farm Business," Agricultural Information Bulletins 309680, United States Department of Agriculture, Economic Research Service.
    • Handle: RePEc:ags:uersab:309680
    DOI: 10.22004/ag.econ.309680
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    Cited by:

    1. Giri, Anil K. & Subedi, Dipak & Regmi, Hari & Ghimire, Monika, 2023. "U.S. farm households’ participation in lending and financial markets," 2023 Annual Meeting, July 23-25, Washington D.C. 335598, Agricultural and Applied Economics Association.
    2. Teegerstrom, Trent & D'Souza, Gerard E. & Osborne, Phillip & Jones, Kezelee Q., 1997. "To Contract Or Not To Contract? A Decision Theory And Portfolio Analysis Of Cattle Contract Grazing," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 26(2), pages 1-11, October.
    3. Tomek, William G. & Peterson, Hikaru Hanawa, 2000. "Risk Management In Agricultural Markets: A Survey," 2000 Producer Marketing and Risk Management Conference, January 13-14, Orlando, FL 19580, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    4. Prager, Daniel & Burns, Christopher & Tulman, Sarah & MacDonald, James, 2020. "Farm Use of Futures, Options, and Marketing Contracts," Agricultural Economic Reports 305690, United States Department of Agriculture, Economic Research Service.

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