Future Business Leaders of America (FBLA) Agribusiness Practice Test

What is the primary purpose of hedging in agribusiness?

1. To increase market prices

2. To offset risk in the market

3. To ensure profitability

4. To enhance government subsidies

The correct answer is: To offset risk in the market

The primary purpose of hedging in agribusiness is to offset risk in the market. Hedging is a risk management strategy used by farmers and agribusinesses to protect themselves from price fluctuations in the commodities they buy or sell. By entering into contracts or using financial instruments such as futures and options, businesses can lock in prices and minimize the uncertainty associated with changing market conditions. This strategy is particularly vital in agriculture, where prices can be highly volatile due to various factors such as weather conditions, crop yields, and shifts in consumer demand. By hedging, agribusinesses can stabilize their income and planning, ensuring they are more resilient against sudden market downturns or unexpected increases in costs. While increasing market prices, ensuring profitability, and enhancing government subsidies may be important to agribusinesses, they are not the fundamental reason for employing hedging strategies. The essence of hedging lies in its ability to provide a safety net against potential losses caused by market volatility.