Minneapolis Grain Exchange
page_title
Home News Market Information Products Resources Real Estate About

400 South 4th Street
130 Grain Exchange Building
Minneapolis, MN 55415

ph: 612-321-7101 or
toll free: 1-800-827-4746
mgex@mgex.com

Facebook
Twitter

 

 

Short Hedge Example Using HRSW Futures     

Hard Red Spring Wheat (HRSW) producers can often lock in profit margins for an upcoming year by using the MGEX futures contract in advance of production.  This can be done by contacting a licensed introducing broker. As an overview, the HRSW producer can utilize a “short” or selling futures position while simultaneously being “long” or owning the physical HRSW commodity.  This is called being “hedged.”

Assume it is February, well before the producer will harvest his wheat, and September’s (new crop) HRSW futures price is $10.40 per bushel. The producer can use the September futures contract to create the short futures position.  

For this example, assume the spring wheat producer has production costs of $6.30 per bushel and knows September futures are trading at $10.40.  This translates into a $4.10 per bushel profit potential.  The HRSW producer can create and utilize a short futures position to lock in the profit potential. Based on September’s production estimate, the processor can “hedge” the product now (February) by selling September futures contracts at $10.40 per bushel.  The number of futures contracts to sell should correlate with the number of HRSW bushels produced.  Each individual HRSW contract represents 5,000 bushels. 

If, for example, the HRSW producer sells his product in September to a cash customer, the producer would exit or offset the short futures positions.  The producer would purchase a comparable amount of futures contracts relative to the amount of physical product sold, which was hedged.  This offsets the producer’s initial short futures position and removes him from the futures market.

If September futures in September are at $8.40, the profits realized on the futures are $2 per bushel or $10,000 per contract ($2 x 5,000 bushels per contract = $10,000).  This example represents the futures position only and does not include local basis.

If upon exiting the September futures in September and the price per bushel is $11.40, the producer will realize a loss of $5,000 per contract ($1 x 5,000 bushels per contract = $5,000). The value of the cash grain is anticipated to increase with the futures prices.

Depending on the account balance level, the producer may receive a margin call from his/her introducing broker in order to maintain the short futures position.  Again, this example highlights the futures position only.  Keep in mind local basis may go up or down which may have an effect on both examples.

 

 
 Cash
  Using MGEX Futures
February 2011 Futures
$10.40
Sell Futures
$10.40
  Less Basis
-0.80
 
  Forward Sell Price
$9.60
September 2011 Futures
$8.40
Buy Futures (offset)
$8.40
  Basis
+0.05
Gain or Loss
$2.00
  Spot Price
$8.45
 

 

Cash forward contract per bushel is $9.60 and for 5,000 bushel contract is $48,000. For the hedger, gain in futures $2.00 plus $8.45 equals $10.45 per 5,000 bushel contract represents $52,250. $4,250 better for the hedger of grain versus the cash forward seller.

 

Market Information
News & Announcements
MGEX Resources

 

Canadian Marketplace Homepage

About Us Apple Juice Concentrate Agricultural Indexes Hard Red Spring Wheat
DISCLAIMER