Futures and options markets are often highlighted as key tools for farmers to manage price risks related to crop production. A common example is a corn farmer using a futures contract to hedge against potential price declines from planting to harvest. By selling a corn futures contract at planting and buying it back at harvest, the farmer offsets potential gains or losses in the value of the crop with corresponding changes in the futures market. This strategy allows farmers to lock in prices ahead of harvest, but how widespread is the use of futures and options among farmers?
This article examines the use of futures markets among farmers, specifically focusing on grain farmers in Illinois. Data reveals that only about 15% of Illinois grain farms actively use futures, a proportion slightly higher than the national average. The use of futures is more prevalent among larger farms, but the majority of farms, regardless of size, do not engage in futures and options trading.
Understanding Futures Use Among Farmers
The study relies on farm financial data from Illinois Farm Business Farm Management (FBFM), focusing on corn and soybean farmers who maintain active futures accounts. While having an active brokerage account is a key indicator of futures use, it does not necessarily mean that farmers use futures in every situation. However, this data provides insight into the frequency and patterns of futures use among Illinois farmers.
Nationally, it is well-established that many farmers do not use futures markets. A 2020 study by Prager et al. found that only about 2% of all U.S. farms used futures or options contracts in 2016. Among those that did, a significant portion were corn and soybean farmers. However, even within these groups, only about 12% of U.S. corn farms and 11% of soybean farms actively used futures or options.
Data from Illinois grain farms mirrors this trend. Over a period from 2003 to 2023, the proportion of farms using futures fluctuated between 13% and 17%. There is no clear upward trend, suggesting that usage has remained relatively stable over time.
Futures Use and Farm Size
The adoption rate of futures is generally higher among larger farms. Data from Illinois shows that 23% of farms with gross crop sales between $1 million and $2 million use futures, and more than 40% of farms with sales exceeding $5 million use futures. Despite this, the majority of farms in all revenue categories do not maintain a futures brokerage account.
Impact of Futures Use on Marketing Outcomes
To understand the effectiveness of futures as a marketing tool, the study compares the marketing outcomes of farms with active futures accounts to those without. While direct data on specific sales or futures trades is unavailable, the study examines two key measures of marketing performance: the new-crop price (average price for corn and soybean sales from September 1 to December 31) and the old-crop price (average price from January 1 to August 31).
The analysis reveals that there is no significant difference in the average prices received between farms with futures accounts and those without. The price ranges are similar, indicating that the use of futures does not necessarily result in better prices for farmers.
Yearly Variations and Market Trends
To further assess whether futures use leads to better marketing outcomes, the study looks at price movements in the December corn futures contract between May and October, the main growing season for corn. In years when prices rose from May to October, farmers with futures accounts did not consistently outperform those without futures. However, in years when prices declined, farmers with futures accounts received a median price slightly higher than their peers without futures. Despite this, the differences were minimal and not statistically significant.
Conclusion
Around 15% of Illinois grain farmers actively use futures as part of their marketing strategy. However, the data shows no significant advantage in marketing outcomes for those using futures compared to those who do not. While farmers with futures accounts may slightly outperform in falling price years, these differences are marginal and not significant.
The study also highlights that many farmers use a variety of other risk management tools, such as forward sales, crop insurance, and government payments, which may reduce the reliance on futures. Although not all farmers trade futures, these markets still play a critical role in price discovery for agricultural commodities, benefiting farmers even if they do not actively trade in futures markets.
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