Here at StatFutures, our tools are predicated on the underlying assumption that, as a producer, you are "long the market" as soon as you invest any resources in a given crop season. In order to manage your price exposure to that market, to put it simply, we need to even you out with a "short" position. So, what do the words long and short mean? We will define them here, mainly as they relate to the futures market. In the options market, the context around long and short matters a bit more, and we will discuss that more in-depth in a future post.
Long is the buy side of an open futures contract or futures option, or positions that are owned.
If someone says they are "long corn," for example, it means they are either buying a futures contract in the corn market, or they already own a position in the market (as a producer does when he plants corn, or even buys the supplies to plant). In essence, that ownership means that the entity has exposure to the price risk in the market.
In futures, a traderdoes not have an inherent position in the market until they "speculate" and buy a long position in the market. At that time, they are exposed to price risk, and, if they are a flat price trader, they are essentially betting that the price will go up. A producerdoes have an inherent position in the market - their estimated production for the season - and therefore they are already long in the market. Without managing price risk by hedging, the farmer is also speculating that the price will go up. As we know, however, that rarely occurs. Most often, as we approach harvest, prices decrease. Therefore, it is prudent for a producer to hedge against price decreases, which can be done with a balancing short position.
Short is the sell side of an open futures contract or futures option, or positions that are owed.
If someone says they are "short corn," it means they are either selling a futures contract in the corn market, or they already owe a position in the market (as a commercial does, when they know how much grain they need to buy/process in order to make their products). Similar to the above, the fact that they are obliged to purchase the corn at some point means that the entity has exposure to price risk in the market.
In futures, a trader does not have an inherent position in the market until they "speculate" and buy a long position in the market.At that time, they are exposed to price risk, and, if they are a flat price trader, they are essentially betting that the price will go down. A commercial doeshave an inherent position in the market - their estimated supply needs for production - and therefore they are already short the market. Because of the sheer size of their operation, commercials are speculating with millions of dollars if they are not managing their price exposure risk. But this never happens; commercials always manage 100% of their price exposure with a balancing long hedge (and often more complicated instruments). At the end of the day, they must have a net zero position in the market, so that they are fully hedged and not speculating.
Each entity in the grain supply chain is exposed to price risk, and each has an inherent long or short position in the market. Every one of those entities are 100% hedged all of the time. Every one, that is, except for farmers. Most farmers are not hedged at all, and those that are hedge only partial amounts of their crop. Being 100% hedged means that you can often lock in a price that is over your cost of production, guaranteeing profitability, even if the market sees a huge decline. You probably won't hit the top of the market, but you will be profitable, and in farming, profitability can be hard to attain.
At StatFutures, we built Hedge My Farm so that farmers can be hedged the way every other entity in the grain supply chain is hedged -- 100%, and using sophisticated spreading tools. Our mathematical optimization model does the same work that takes the salaries of expert traders at the elevators and commercials to accomplish. We want you to be profitable in an uncertain global market by taking our model output and sharing it with your broker or other trusted adviser, and making an informed, scientific decision about the market.
Refer to this article from Montana State University Extension to learn more about the advantage of putting on a short hedge in the wheat market.