For decades U.S. farmers have been advised to consider using marketing contracts, futures and options contracts to manage risk. A new study from the U.S. Department of Agriculture finds that many agricultural producers, particularly larger operators who raise corn and soybeans, are doing so.
In 2016, more than 156,000 farms used marketing contracts and more than 47,000 farms used futures or options to hedge price risks, according to the report from USDA's Economic Research Service, or ERS. The report, based primarily on data from the 2016 Agricultural Resource Management Survey, focused on corn and soybeans.
The study reflects that these financial tools tend to be most relevant to larger-scale farmers who raise corn and soybeans and typically are less useful to smaller producers, especially ones who raise specialty crops, said Frayne Olson, North Dakota State University extension crop economist/marketing specialist. Agweek asked him to look over the ERS report.
The report studied "small-, medium- and large-sized farm" across the nation. Trouble is, "large is a relative term," with its meaning varying in different regions of the country. "A large farm here in North Dakota has a very different context than a large farm in, say, Tennessee," he said.
He noted that smaller farms, especially ones that raise a variety of crops, may not produce enough of any one crop to make effective use of the financial tools. For example, one contract of corn on the Chicago futures market is for 5,000 bushels, too large to be useful for some producers.
"For some of the small farmers — quote, unquote small — who have only a few hundred acres, who have very diversified agriculture — those contract sizes sometimes get in the way of different marketing strategies," he said.
The Upper Midwest also raises a number of specialty crops for which futures contacts aren't available, which also reduces the appeal of these financial tools, he said.
The study says
The study found that the corn and soybean producers who used financial tools tended to make relatively heavy use of them. For example, while only a little more than 10% of corn and soybean producers traded in futures contracts, those who did covered more than 40% of their production. Likewise, while only 20–25% corn and soybean farmers used marketing contracts, those who did covered more than 40% of their production with the tool.
Use of the financial tools also is associated closely with farmers' age and education, the report found. For example, nearly 18% of college-educated corn and soybeans farmers used futures, as did nearly 25% of operators aged 35 or younger.
As the report noted: "These tools can help guarantee producers an established price before harvest. Futures, options and marketing contracts each have pros and cons. Strategies to manage risk can vary in key ways: with ranges in upfront costs, flexibility of contract terms, risk of default by the other party; and ease of closing out a contract."
Farmers in general are making greater use of these financial tools, Olson said.
"The trend line is upward, though it's a slow process. There's still a lot of need out there for additional education and additional training," he said.
State Extension services sometimes offer educational opportunities involving these financial tools, as do some private companies, he said.
Farmers also can consider working with marketing consultants who can help to educate, though their primary job is to make recommendations, Olson said.
To read the ERS report, visit https://www.ers.usda.gov/publications/pub-details/?pubid=99517.