The vertical axis shows the probability of various income levels, while the horizontal axis shows the income level. The actual levels of income, of course, will vary depending partly on how high prices are when you make the hedging or forward contracting decision. The chart serves as a caution that these tools do not by themselves guarantee income, because of yield risk. The left side of the chart reflects average yields sharply below normal and high market prices. When that happens, forward contracts have to be bought back at higher prices, or losses occur on over-sold futures positions.
Gross income declines due to the market and yield losses.
Hedging or contracting also prevents farmers from taking advantage of higher prices later on. In Iowa, there is a strong tendency for prices to rise when yields are low. It is somewhat less in early July, when crop prospects are less uncertain. If a short crop is developing, the market usually begins to sense that by early July. An alternative tool is to use options market to establish minimum new-crop prices, while retaining upward price flexibility.