Commodities Futures Level I (Core)

When using a buying hedge (or long hedge), feed inputs are still purchased in the traditional cash market. As a buyer, you are looking for protection from an increase in cash prices between now and the time the input is purchased for livestock feed.

Therefore, to place the hedge you take a long position (a buy) for the appropriate amount of futures contracts to meet your future feed input needs (table 2 on page 2 provides specific contract quantities).

This initial purchase in the futures market offsets your expected cash market position of buying inputs to feed your livestock.

The initial purchase in the futures market (placing the hedge) is anticipatory, and typically made well before the feed input is actually needed. Futures contracts are generally available between one and two years in advance.

To lift the hedge, the long futures position is offset when the feed input is actually purchased on the cash market. The following example involves the purchase of corn for feed. Long hedges can also be used by buyers of other inputs, such as protein meal or feeder cattle.

Top