Managing prices before the harvest can be tricky because of ‘yield risk’.
The idea of yield risk is pretty simple: your planned harvest yield should be the same or less than your final harvest yield. If you thought you would harvest more than you did, you lose money on all transactions you made before the harvest. On the other hand, if you end up with more than your planned harvest yield, you make more money on those transactions.
A study [1] also highlighted the importance of yield risk, indicating that adding yield risk reduces the advantage of profit margin hedging.
So, making careful and accurate estimations of your pre-harvest yield is crucial. If you don’t follow this rule of yield risk, you stand to lose money.
[1] Kim HS, Brorsen BW, and KB Anderson. ‘Profit Margin Hedging.’ Paper presented at the NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management, Chicago, Illinois, USA. 2007. Available at: https://legacy.farmdoc.illinois.edu/nccc134/conf_2007/pdf/confp14-07.pdf