Question

Suppose a soybean producer planted 2,000 acres – with an average yield of 40 bushel an acre. Current soybean prices are $9.10/bushel, but are expected to fall because of declining demand from China. The producer can enter into a 4-month futures contact at a price of $8.80/bushel. After 4 months, the producer will harvest and sell the crop. A standard soybean contract is written for 5,000 bushels. a. If the soybean farmer wants to hedge to reduce the risk that a price decline would lower farm revenues, should the producer adopt a long or short position in the futures market? How many contracts does the producer need to buy to protect the entire crop? What would revenues be if the price remained at $9.10/bushel? b. Suppose after 4 months the market (spot) price fell to $8.40/bushel. How much higher or lower would the producer’s income (revenues) be compared to the revenues earned without a futures contract?

Answer 1