What are forward contracts?

Home \ Prices & Stats \ Risk Management \ What are forward contracts?

A simple instrument available to deal with price risk is a forward contract (also called a cash contract), where farmers and buyers of agricultural produce agree in advance on the terms of delivery regarding quantity and price. With this type of contract, the farmer foregoes the opportunity of achieving a higher price for their output – or a lower price for any input purchases – on the open market but is able to lock-in a price for future delivery. 

Forward contracts can have important implications in the planning of the business, allowing the business to plan ahead, having already secured the price for their output and/or input costs.