AREC 384 more hedging

• selling hedge
• farmer or processor who has extra space and wants to make money from storage feeds and shift risk

take this strategy if you believe the basis will get narrow as you get closer to the futures contract date for a storable commodity

• shift risk
• earn income from storage

no guarantee that changes in basis will be sufficient to cover storage costs

• short hedge that allows farmers to lock in a profitable selling price
• make an educated guess that the price will probably be around a certain futures price for a certain maturity date
• then you make your planting decision

shift risk and lock in high price

requires accurate prediction of local harvest basis, which differs from location to location

• when one offsets in the futures market for a product that is highly correlated with the product of interest 
• prices move together or exactly opposite - clear relationship