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Do You Expect Producer Hedges To Lose Money?

I saw a comment on the forum that hedges lose money 90% of the time.  Do you think that is true?  Why would anyone ever sell futures if they thought that 90% of the time they would lose money?  My understanding was that with a hedge, you lock in a price and eliminate price risk.  You sell the boartd in the spring because prices are higher and you think they'll go down by the time you are ready to sell the cash.  Nlo?  How does that lose money?


I have heard others say that options lose money 90% of the time, which may be more believable, but what is the function of an option?  I understood an option was more like an insurance policy.

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4 Replies
Senior Contributor

Re: Do You Expect Producer Hedges To Lose Money?

Some people think of it as an insurance policy, something to protect you in bad times, but not something you wish to collect on regularly.

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Senior Advisor

Re: Do You Expect Producer Hedges To Lose Money?

I would say I lose money on insurance policies at LEAST 90% of the time. But I want protection 100% for some possibilities.

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Veteran Advisor

Re: Do You Expect Producer Hedges To Lose Money?


even being a non-producer-I think of TRUE hedging as selling actual new crop futures contracts--not buying option puts.


often times --the C/B/W price will reach it's yearly high in late spring/summer--well before harvest............


........therefore I would see it as a prudent business decision to sell some Dec contracts near that high to "lock in" a higher price than harvest prices.


eg. say a producer has 1000 ac corn - avg prod = 150bpa = 150,000 bu or 30 contracts - they think Dec. price peaks near $5.50 in early Jun--so they split the difference--sell 15 contracts/half anticipated prod.-----------a win/win---if prices goes down into harvest to $4.75 - locked in about $5.12 overall------if price trades to $6.00 at harvest --then it's $5.75 overall.


do i get the idea??? if prod has a STRONGER sense Jun IS the high - maybe lock in 75-80% overall!


to crunch the #'s - say on the 50/50 scenario - producer physically sells ALL product for $4.75, but makes an add'l $0.75 cents X 15 contracts X 50 cents/contract = $56,250 on the futures (paper) side-- MORE than if they didn't hedge at all.................. 


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Honored Advisor

Re: Do You Expect Producer Hedges To Lose Money?

Expect is not the right word.  I don't expect to loose money on the hedge.   I hope to loose money on the hedge.  But I am most proud of the hedge when it makes money.


I find I dislike hedges when I place them for the wrong reasons.---- like,  "this is not a good price but I will accept it in fear of a worse price."   -------------   especially when 80% of the marketing year is ahead of me.  


Sometimes one of the first indicators that a producer is borrowing too much.

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