Physical
vs
Financial

Why does the difference matter?

As a farmer, you are always managing two positions at once — whether you realize it or not.

Your physical position is the grain you are growing in the field or storing in your bins. The moment you plant a crop, you are effectively "long" on the physical commodity. You own it (or will own it), and you need the price to be high when you eventually sell it.

Your financial position is whatever you've done on paper to protect or price that grain. Selling a futures contract, buying a put option, or signing a forward delivery contract with your local elevator — these are all financial positions. They exist to offset the risk sitting in your bins.

When these two positions are properly aligned, your farm is protected. When they're not, you're exposed — and that exposure can cost you real money.

The danger of being unbalanced

Problems arise when your physical and financial positions don't match up.

Too much physical, not enough financial:
This is the most common situation on farms. You have bins full of grain and no price protection. You are fully exposed to the market. If prices drop, you absorb the entire loss. Many farmers sit in this position for months after harvest, hoping for a rally that may never come.

Too much financial, not enough physical:
This is the opposite — and it's dangerous in a different way. If you sell more futures contracts than you have physical grain to back them up, you are speculating. If the market rallies, you owe money on those contracts with no physical grain to offset the loss.