Sky-High Commodity Futures Prices Not Good for Farmer?

It's counter-intuitive, I know. But the sky-rocketing prices of commodity prices have made things difficult for farmers. Logically, you would think that higher prices for their produce would make farmers ecstatic, and they are. Getting more for their output is always a good thing. The problem arises from what has been happening in the financial markets and understanding how farmers use those markets to protect their income.

Farmers are investors! It's true; although farmers have an unwarranted stereotype of being uneducated 'rednecks', reality is far from that.

First you have to understand that farmers plant their crops months before they'll be able to harvest and even longer before they'll be able to sell. This leaves farmers with a lot of uncertainty as to what they'll actually get for their harvest when they're sowing those seeds. To help hedge against that risk, farmers participate in the futures market - selling contracts on exchanges like the Chicago Board of Trade (CBOT). They do so in order to ensure that they'll be able to sell their crops at the price guaranteed by their contract - regardless of what the market condition is at the time of harvest. The problem is volatility.

So many new investors have entered the hot commodities markets that volatility in these markets has almost doubled over the past year. That doubling means a lot more uncertainly for those selling the contracts - farmers. What used to be a great way to hedge against uncertainty now has more uncertainty that the market for the crops itself. The market for crops such as grain and corn have been rising steadily for most of the past decade. This is the saving grace for farmers; while they may not be able to use the future contracts to protect future revenues, those revenues are more likely than not, to rise.

...Of course, then there's the whole problem that farmers face with the rising cost of fuel, but that's a story for another time.