The effectiveness of futures markets as a mechanism for price risk management

This study explores the utility of futures markets in the agricultural sector, examining their effectiveness in mitigating price risk and their capacity to reflect market fundamentals. It also examines the impact of the growing presence of non-commercial participants on the price efficiency of derivative markets and the relation with corresponding physical markets. The paper analyses at the correlation between futures and spot prices, as well as the stability of the basis as a key indicator of hedging effectiveness. Despite increased market liquidity, futures markets retain their function as a viable mechanism for price risk management, particularly in the context of short-term strategies. The findings emphasize the need to tailor hedging approaches to specific market conditions and time horizons, reaffirming that futures contracts remain a relevant and adaptable tool for managing price volatility when applied with sensitivity to market dynamics and the diverse objectives of market participants.