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Why should a farmer hedge to try to lock in a price for his or her...

Why should a farmer hedge to try to lock in a price for his or her expected production of corn?

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The reason why a farmer must hedge to try to lock in a price for his or her expected production of corn is that in case of a bad weather the farmer’s production would be less than expected. Other farmers are likely to have been affected similarly. The overall corn production will be less & as a result the price of the corn will be high. The farmer’s problems arising from the bad harvest will be made worse by losses on the short futures position. This emphasizes the need for looking at the big picture when hedging. Hence the farmer is correct to question whether hedging price risks while ignoring other risks is a good strategy.

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