A notable exception is grain sorghum. Because of grain sorghum's close price relationship to corn, input purchasers can use corn futures to manage grain sorghum price risk. Pay close attention to the contract month. Project the date of the anticipated cash market transaction and select the futures contract month that best corresponds to that date. Understand basis and develop a basis forecast.
Basis is the relationship between local cash prices and futures prices.
Failure to account for basis and basis risk could ensure not meeting your buying hedge pricing goals. Be disciplined and hold the hedge until cash commodity purchases or the hedge is offset by another price risk management tool. Producers should only hedge prices that are acceptable to them. Once a hedge position is initiated, the hedge should not be removed before the cash purchase date without careful consideration of the risk exposure. Joe needs to purchase 120 head of 750-pound feeder cattle in October to replace fed cattle that will be sold at that time.