Hedge position sizer: how many futures contracts cover your production
Production and a hedge target into a number of contracts.
Hedge / position sizer
Hedge / position sizer
How many futures contracts cover your production.
30,000 bu hedged · 60% of production · 20,000 bu still open
How many futures contracts do I need to hedge a share of my crop?
Futures trade in fixed lots. A CME grain contract is 5,000 bushels, so production rarely divides evenly into contracts and a hedge almost never lands exactly on the percentage intended.
This sizes the position and then shows what the rounding actually did: how many bushels ended up covered, what share of the crop that is, and how much is still exposed to the market.
Worked example
- Commodity
- Corn (5,000 bu contract)
- Production
- 50,000 bu
- Hedge target
- 60%
- 50,000 bushels × 60% = 30,000 bushels to hedge
- 30,000 ÷ 5,000 bushels per contract = 6 contracts
- 6 contracts × 5,000 = 30,000 bushels actually covered
Six contracts cover 30,000 bushels, which is 60% of the crop, leaving 20,000 bushels open. This one divides evenly; most do not, and the rounding is the part worth looking at.
How it works
The target percentage is applied to expected production, then divided by the contract size and rounded to the nearest whole contract. Rounding is what makes the result differ from the intention: 42,000 bushels at 60% is 25,200 bushels, which is five contracts, or 25,000 bushels. The target was 60% and the position is 59.5%.
On a smaller operation the rounding matters much more. At 12,000 bushels, one contract is 42% of the crop and two is 83%. There is no position between them, which is why smaller operations often use options or forward contracts with an elevator instead, where the quantity can be set freely.
Expected production is an estimate until the crop is in the bin. Hedging a share of a yield that does not arrive leaves the position larger than the crop, which converts a hedge into a speculative short. That risk is the reason most operations hedge a portion rather than all of it, and raise the portion as the crop becomes certain.
contracts = round((expected production × hedge target %) ÷ contract size)What rounding does to a 60% target, by size of crop
Corn, 5,000 bushel contracts. The smaller the crop, the coarser the instrument.
| Production (bu) | Target 60% | Contracts | Actually covered | Real % |
|---|---|---|---|---|
| 12,000 | 7,200 bu | 1 | 5,000 bu | 42% |
| 25,000 | 15,000 bu | 3 | 15,000 bu | 60% |
| 42,000 | 25,200 bu | 5 | 25,000 bu | 60% |
| 50,000 | 30,000 bu | 6 | 30,000 bu | 60% |
| 85,000 | 51,000 bu | 10 | 50,000 bu | 59% |
Common questions
How big is a grain futures contract?
Corn, soybeans, wheat, sorghum, barley and oats all trade in 5,000 bushel contracts on the CME. The bushel is the same unit in each case, but the weight behind it is not: a bushel of corn is 56 pounds and a bushel of oats is 32.
Does a hedge of 60% mean I have locked in 60% of my income?
No. It means 60% of the bushels have a futures price attached. The cash price still depends on the basis at the point of sale, and basis is not hedged by a futures position. A futures hedge fixes the board, not the bid.
What happens if I hedge more bushels than I grow?
The excess stops being a hedge. A short position with no crop behind it gains when prices fall and loses when they rise, with nothing on the other side to offset it. That is a speculative position regardless of the intent behind it.
Should the hedge be placed all at once?
That is a marketing decision rather than an arithmetic one, and it depends on the operation. What the sizer shows is the total, so it can be divided into however many pieces a marketing plan calls for.
Related
This tool is designed to help plan your overall portfolio and is not trading advice. You should carefully consider your portfolio, risk tolerance, and other metrics; Consult with your broker prior to making trading decisions