A benefit derived from selling futures contracts is that it enables the trader to establish, in advance, an approximate price for crops he or she intends to harvest and market at some future time. This provides protection against dangerous price swings, and enables speculators to profit from market fluctuations. A hedge is the buying or selling of a futures contract for protection against the possibility of a price change in the physical commodity that the trader is planning to buy or sell. A short hedge is the selling of a futures contract to protect the sale price of a commodity the trader is planning to sell. A long hedge is the buying of a futures contract to protect the purchase price of a commodity the trader is planning to buy.
Most traders are able to liquidate or offset contracts prior to delivery.
The long trader can offset a futures contract by subsequently purchasing a contract with the same delivery month. While most contracts entered into do not result in delivery, the threat of delivery still tends to serve the purpose of keeping the prices of futures contracts and their underlying cash market in reasonable alignment with one another. The cash market is where physical commodities are bought and sold. In order to successfully hedge, producers must first determine what target price they need to cover cost of production to make a reasonable profit. Using cost of production figures and devising a reasonable profit margin, producers can establish their target price range.