Farmers already have lots of ways to manage risk. Get ready for more, regardless of whether you need them. In addition to futures, options, insurance and cash contracts, prediction markets offer new opportunities to fine-tune protection. But is that a blessing or a curse?
Prediction markets don’t buy or sell grain or connect buyers with sellers. But they can work as an alternative way to offset some of the risks growers face — at least in theory. The key is which risks and at what cost. And likely, for how long.
Lawmakers big and small are circling their own wagons with ideas for regulating or maybe even outright banning these products. Agencies such as the Commodity Futures Trading Commission are claiming jurisdiction, and some organizations, including the American Farm Bureau Federation, are concerned about negative market impacts.
First, what are these markets?
Applications like Kalshi, Polymarket and others offer two-sided wagers: yes or no bets. Prediction markets initially focused on sports, and then expanded to economics, politics and pop culture. In agriculture, they now offer micro-hedges on, for instance, localized weather freezes, input price spikes or specific yield forecasts.
Rules are changing quickly. Bets on energy and precious metals traded at the end of last week, but major prop markets appear to be leaving specific grain price questions to established futures exchanges like the CME Group. Still, prices aren’t everything.
So, how could farmers use these markets?
Say falling profits are a worry. Prediction markets last week didn’t appear to offer any propositions directly on agriculture’s earnings for next year. But you could cobble together different trades that influence net farm income. Production of crops and livestock might work as a surrogate for income; expenses reflecting changes in key cost barometers like unleaded low-sulfur diesel could be a stand-in for expenses.
And if a bet isn’t on the table, you could submit the idea for consideration and see if the prop market is ready to offer opinions on, say, estimates of ad-hoc “bonus” payments to growers.
It’s likely far from perfect, but remember, the same can be true with futures or any other tool. Wide or volatile basis in your cash market could make futures hedges less efficient, for example.
Define a hedge in the props market
Harvest is a good time to consider pros and cons of different tools. So, here’s an introduction to props.
Two basic types of contracts are typically in play:
- Event contracts. Will a specific event happen by a specific date?
- Constant prices. The other contracts available cover constant prices of an asset like crude oil or gold figured on a perpetual basis, where rolls from one contract to another delivery are eliminated. These don’t appear to be available currently for grains but could be used if ultra-low sulfur diesel was a surrogate for production costs.
If you lock crops in storage, you could wind up with a lower net price if the market doesn’t rally. That could happen if yields rise. USDA put the national corn yield at 181.2 bushels per acre in its Oct. 12 estimate. Prediction markets offered a way to cover the risk of bigger yields in the government’s final report Jan. 12.
The proposition might be phased this way: “Will USDA’s national average corn yield reported Jan. 12, 2027, be more than 181.2 bushels per acre?”
Putting a bet on “yes” cost 50 cents a contract, and pays $1 if the yield is higher, which could trigger a sell-off in corn. That might be useful if transaction costs — fees plus the cost of a losing bet — are less than potential gains.
So, the trick is not only finding the right bet or bets but also figuring out the hedge ratio needed for the level of protection desired.
Covering $100,000 in net farm income might be done in one fell swoop, the equivalent of a big bet all “on the nose” at the market price.
The entire $100,000 could be bet on this proposition. Or the sum could be spread over a series of props based on historical results or a mathematical model like the one I used to forecast prices. This is complex but also seems ready-made for an AI bot to tackle.
What are the costs?
I grew up in a track town, and one lesson we learned as soon as our math skills allowed: The house always wins. Before money is transferred from losers to winners, the track takes a percentage of the handle.
Transaction fees on prediction markets vary but generally max out at $1.75 per side, with some costs rising as a position moves closer to the market. Another line in the calculations: Perpetuals may earn something like interest that can help offset transaction fees, which also include slippage between bid and ask spreads.
And there’s another cost futures hedgers know all about: margin. Traders must deposit funds up front in their accounts, with gains and losses marked to the market, usually daily. Initial and maintenance rules sound suspiciously like those at the commodity exchanges — one of the reasons the Commodity Futures Trading Commission claims at least some jurisdiction.
One final box to check further: Volume in most of these contracts is fairly light, especially compared to established exchanges, and thin markets bring elevated risk of bad fills.
Are prediction markets the brave new world of the future, or is their flash-in-the-pan trending moment already over? Stay tuned, but don’t expect your elevator manager to start “beaming” grain up to his spaceship — yet.