How does an agri futures contract work?
Hedging contracts in the commodity derivatives market can be entered into at any time of the year, but are settled in March, July, September and December. Say a farmer buys a futures contract in January, expiring in July, to lock in a maize price of R2,700. Come July, the actual price of maize has fallen to R1,700. The farmer sells 100 t of maize at the lower price, but then recovers the difference, in this case R1,000, from the futures contract. In this way, futures contracts make it possible for farmers to get more consistent pricing for their crops and enable them to recoup costs relating to the buying and selling of physical maize.