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Farmer Ted's Forward Sale
Ted takes advantage of price increases prior to harvest by pre-selling 1,000 bushels of corn. If disaster affects his yield, crop insurance provides the funds needed to settle his forward contracts.
Ted takes advantage of price increases prior to harvest by pre-selling 1,000 bushels of corn. If disaster affects his yield, crop insurance provides the funds needed to settle his forward contracts.
WITH CROP INSURANCE Ted has the confidence to take a risk to forward contract his corn. He sells 1,000 bushels at a futures price of $4.50 / bushel.
Ted produces the expected 1,000 bushels, benefitting from the pre-sale price.
If Ted didn't produce enough corn, he could fulfill his contract with money received from his crop insurance indemnity payment.
WITHOUT CROP INSURANCE Bill doesn't feel secure enough to make a forward sale. Instead, he sells when his corn is harvested, at a price of $4.00 / bushel.
Bill makes $.50 less per bushel than Ted.
Marketing plans that incorporate crop insurance allow farmers to take risks, stay competitive, and grow their businesses through innovation.