As long as the basis forecast is accurate, the projected hedgable price will equal the actual realized cash price. Steps to Implementing a Successful Buying Hedge 1. Analyze expected profit of the enterprise and determine your maximum purchase price. Determine the quantity to hedge. Use the proper futures contract.
Futures contracts are available for most widely-produced agricultural commodities.
Be sure you use the proper contract month. Understand basis and make an accurate basis forecast. Be disciplined Maintain hedge position through cash purchases or until another price risk management tool is implemented. Do not remove a hedge position prior to cash purchase without very careful consideration. Case Example Feeder Steers Buying Hedge Joe is a cattle feeder who needs to replace a pen of cattle in the feedlot in October.