Agricultural Futures Contracts as Part of a Sustainable Investment Strategy: Issues and Opportunities

Abstract

Futures and forward contracts together offer farmers of all sizes important tools for shifting and managing production risk. This risk shifting is particularly apparent in the U.S. grain complex, where the United States also has a significant export position. Because of this international reach, we argue that the futures and forward markets play a critical role in reducing world food insecurity and thus contribute to satisfying Sustainable Development Goal #2: Zero Hunger. We further argue that the presence of investors willing to take the opposite side of the farmers’ natural short hedge helps futures markets perform their key functions of price discovery and risk management. In addition to these roles, futures markets also enable farmers to finance their crops more efficiently over the production cycle, supporting operational stability. Finally, we highlight that agricultural markets in the United States are supported by significant regulation at the county, state, and federal levels. These farming regulations, coupled with federal oversight of agricultural futures markets, provide sufficient confidence that the goal of Zero Hunger is being pursued in an appropriate and effective manner, reinforcing the case for agricultural futures as a meaningful component of a broader sustainable investment strategy.

1. Introduction

Commodity investing as a sustainable investment is a relatively new topic in the investment literature [1]. For example, in the section “Commodities and Responsible Investing” in the Handbook on Responsible Investment across Asset Classes, [2] (p. 80) state, “Unlike other asset classes, few opportunities to incorporate environmental, social and governance (ESG) factors into commodity trading currently exist.” In addition, there has been a tendency to lump together commodity trading and commodity futures trading. While they are obviously related, little or no attention has been paid to the significantly different role that futures markets play in the commodity production cycle and, in particular, the crop production cycle. This is mostly driven by a lack of understanding about the actual mechanics of derivative products, even in publications that recognize the benefits of futures markets. As [3] noted decades ago, such misunderstandings have long shaped outside perceptions of futures markets, often obscuring their practical value to those less familiar with their function.

The financial system is now seen as a key lever in driving sustainability transitions [4]. This perspective encourages reconsideration of how financial instruments, such as commodity derivatives, can be better integrated into the sustainable finance agenda. While sustainable finance has gained significant academic and policy attention, it remains largely focused on traditional asset classes such as equities and bonds (see [5] for a recent review). Ref. [6] argue that derivatives, including commodity-based instruments, can play a meaningful role in advancing sustainability objectives. Building on this view, our analysis highlights the potential for agricultural futures markets to support food security, improve financial resilience for producers, and expand the toolkit available for sustainable investment.

At the same time, important scholarly and policy debates have emerged around the financialization of agricultural commodity markets, particularly concerning the roles of speculation and hedging, the potential for investor-induced price volatility, and the broader implications for food security [7,8]. These discussions reflect contrasting perspectives: while some view financial investor participation as a source of market disruption [9,10], others claim the evidence is not conclusive [11,12]. A more balanced, theoretically grounded assessment is needed, one that recognizes these tensions and evaluates how agricultural derivatives interact with sustainability and food security goals. Over time, regulatory reforms have addressed many of the concerns raised in earlier debates [11], helping to curb excess speculation and improve transparency, with no major incidents of market failure in agricultural futures observed in recent years (The benefits and challenges of increased agricultural commodity market transparency, including derivatives, through price monitoring and early warning systems to support well-functioning food markets are a topic of academic research (see [13] for a detailed review of the literature). This is reflected at the international policy level in United Nations Sustainable Development Goal (UN SDG) Target 2.c, as well as in the initiatives of the Group of Twenty (G20). In 2011, the G20 established the Agricultural Market Information System (AMIS) (https://www.amis-outlook.org/home, accessed on 7 July 2025). AMIS is an inter-agency platform covering four major internationally traded food staples (soybeans, corn [maize], wheat, and rice). It connects the main trading countries of these commodities as well as leading international and national organizations and entities. The platform provides the public with timely, integrated data and policy analysis, as well as a mechanism for coordinating policy steps. Particularly relevant to our paper, AMIS provides a futures market dashboard that tracks futures prices, volumes and volatility, forward curves, and investment flows across CME and Euronext contracts and data from CFTC Commitment of Traders reports). Despite remaining concerns, these markets continue to deliver tangible, day-to-day benefits by enhancing price stability, facilitating risk transfer, and supporting agricultural production, thereby contributing meaningfully to global food security.

In the following article, we examine in some detail how agricultural futures markets in the United States function. We focus on the crucial role that these markets play in agriculture by offering mechanisms designed to address market failures that can and do lead to food insecurity in terms of quantity, variety, and quality (See “The State of Food Security and Nutrition in the World: 2019 Report” [14] for more details. By way of analogy, see the following quote from [15]. With respect to steel, the author writes: “If there are only spot markets for steel, the railroad industry cannot easily inform the steel industry of its interests through the marketplace. This inability to communicate desirable interactions and to coordinate timing is an example of a market failure and has been used as a justification for public involvement in development efforts….However, if we correctly recognize that there are simply too few markets, we can easily find another solution by creating a futures market for steel… It is easy to show that as long as agents behave competitively and equilibrium exists the addition of futures markets will solve this type of market failure” [15] (p. 186). For a discussion of market failures in the agricultural sector, see “World Development Report 2008: Agriculture for Development” [16] and “Regulation and the Transformation of Agriculture” [17]). Throughout the paper, we draw on examples from a broad range of physically delivered agricultural commodities traded in U.S. futures markets. While corn and soybeans receive more focused attention in our discussion, they are used primarily to illustrate broader dynamics. Our inferences apply more generally across the spectrum of U.S. grain commodities, including wheat and oats, as well as processed products such as soybean oil and meal (We selected corn and soybeans because they represent the dominant share of U.S. grain production and exports. Together, they accounted for over 80% of total U.S. grain production in recent years and dominate agricultural acreage in major producing states [18]. The same crops also represent two of the largest U.S. grain exports [19]. In addition, the USDA provides extensive, high-frequency data on both crops—partly because they are often planted as substitutes—which allows for more detailed and consistent analysis. Our emphasis reflects practical considerations and our arguments extend to other physically delivered U.S. grain commodities such as wheat and oats, as well as derivative products like soybean oil and meal). We highlight the complementary role institutional investors play in these markets as risk-bearers and liquidity providers. This risk mitigation enables farmers to finance their crops more efficiently over the production cycle, thereby mitigating food insecurity.

In addition, we argue that the U.S. regulatory framework surrounding both agricultural production and futures markets facilitates more objective assessments of sustainable production practices. The United States imposes extensive regulatory controls through agencies such as the United States Department of Agriculture (USDA), Environmental Protection Agency (EPA), and Commodity Futures Trading Commission (CFTC), contributing to a reasonably robust governance structure. These include labor protections, environmental standards, market transparency requirements, and delivery mechanisms that enforce standards on origin, quality, and production practices. This federal regulatory structure is augmented by the Agricultural Departments of each state and many counties with significant agricultural activity, often working in coordination with the agricultural extension services located at every Morrill Act college in the country (The initial Morrill Act was passed in 1862. The Act gave states the ability to develop land grant universities (Michigan State, Penn State, Cornell), which supported research and teaching in agriculture. The Smith-Lever Act of 1914 created the Cooperative Extension Service. While neither are regulatory organizations, they both share research-based outreach to farmers, supporting a community which shares best practice in agriculture). Because U.S. regulation is recognized as comparatively effective and comprehensive, we make the case that U.S. agricultural futures markets represent a credible and practical vehicle for investors concerned with promoting transparent and sustainable food systems.

This case gains further support from the 2030 Agenda for Sustainable Development, adopted by UN Member States in 2015, in which countries commit to sustainable development across economic, social, and environmental dimensions [20]. Among the 17 Sustainable Development Goals, SDG #2 aims to end hunger, achieve food security, and promote sustainable agriculture. Notably, Target 2.c explicitly calls for the proper functioning of food commodity markets and their derivatives to help limit extreme price volatility. This affirms the relevance of derivatives to global food security. Academic work on systems thinking [21] and institutional diversity [22] (p. 6) provides important context for viewing derivatives markets as adaptive tools within broader food systems. Recent evidence supports this view: [23] show that well-regulated derivatives markets enhance price stability, risk management, and transparency—especially valuable in developing countries where such tools remain scarce [24]. As they note, early SDG-era concerns over volatility have been tempered by evidence that regulation has helped contain such risks. In this context, U.S. agricultural derivatives markets represent a credible and practical vehicle for investors seeking to support food security in alignment with SDG #2.

In this study, we argue that a more practical definition of sustainable investment would include participation in agricultural futures markets, as these markets offer tangible support to individuals and firms involved in the production and distribution of agricultural goods, especially within appropriately regulated environments. In the United States, where such regulatory frameworks are well established, these markets contribute to broader sustainability goals by helping farmers hedge price risk, stabilize income, access credit more easily, and make better-informed production and investment decisions [25,26]. In this way, they serve as tools that enable financial investments to contribute to agricultural resilience, food system stability, and rural economic development, all central to advancing SDG #2: Zero Hunger. Future efforts should focus on expanding access to futures markets for commodity-dependent developing countries and their citizens, extending participation, deepening liquidity, and strengthening risk management within their agricultural sectors.

The paper is structured as follows. The next section reviews the fundamentals of commodity futures markets, including their key participants (i.e., hedgers and investors), the growing financialization of these markets, and the environmental and social risks associated with their operation. Section 3 explains the role commodity futures markets play as a crucial risk management tool for agricultural hedgers, how hedging increases hedgers’ access to finance, and clarifies some misunderstandings about the agricultural futures contracts. In Section 4, a discussion on why investing in U.S. agricultural futures contracts should be considered a sustainable investment is provided. Section 5 concludes the paper by summarizing the key points of this study.

2. Background

2.1. Fundamentals of Commodity Futures Markets

Commodity futures markets provide prices, which give signals to market participants [27]. Rising food prices will signal to the marketplace the need to produce more of the particular product, and farmers—large and small—will respond accordingly. For example, Spring 2025 showed corn prices outperforming soybean prices. Farmers switched acres from soybeans to corn. (Surveys of farmers by the Department of Agriculture expects corn acreage to rise by about 95.3 million acres, while soybeans decline by about 83.5 million acres [28]). The market responds to the increase in price by taking steps that will reduce the price. The opposite reaction of producers and consumers results in the mean reverting nature of commodity prices. This is the natural result of the market responding to changes in prices. However, these changes in prices result in volatility.

While price volatility affects both producer and consumer, the impact on the producer is greater because of the relationship between price risk and the ability to fund the crop through the harvest cycle. Farmers manage this price volatility via risk management. “The main advantage of such [derivatives] risk management instruments is that the hedging entity can determine the cost or revenues at the time the hedge is initiated” [29] (p. 10). When you reduce price risk, lenders are much more willing to supply the credit you need to farm. The ability to borrow over the crop cycle results in increased farm inputs available to deploy. The farmer has the incremental resources to acquire yield-enhancing products. All other things being equal, the market response to this increased supply will be greater price stability, if not downward pressure on prices.

There is one dominant futures market in North America for each agricultural commodity traded (The history of futures market development shows that, for each commodity and time zone, one contract typically becomes dominant. When multiple exchanges list similar contracts, trading volume tends to consolidate on a single venue over time. This outcome reflects the fact that liquidity dominates basis risk: market participants prioritize the ability to enter and exit positions efficiently over perfect alignment with local delivery terms. As [30] explains, liquidity attracts further liquidity through strong network effects, ultimately making one contract the preferred benchmark for hedging and price discovery). Each futures contract has relatively few places to deliver to. Commodity futures in the United States have existed for 170 years and have evolved significantly during that period. Institutions and structures have developed to encourage trading among strangers. If this were a market where only commercial firms participated, we would not need to deal with strangers. Credit analysts and a legal team would be all that is required. Futures markets serve to provide a means for risk management and price discovery [31,32,33,34]. For these markets to serve these two critical functions properly, all parties must be allowed to participate.

This brings up the concept of liquidity, which is the ability to turn an asset (physical or financial) into cash quickly with little loss in value. Futures markets have evolved over time to concentrate liquidity in one trading venue. In this way, all trading activity is directed to one location, maximizing the available liquidity and minimizing trading costs. Basis risk is the risk that the futures price and the cash price will change by different amounts. Futures markets often choose arrangements that favor liquidity over basis risk. In order to understand this bias towards liquidity over basis risk, one must first understand two important groups that are necessary for the proper functioning of futures markets.

2.1.1. Hedgers

The first group consists of hedgers, who need well-functioning futures markets in order to be able to exchange their more volatile price risk for the less volatile basis risk. If the basis risk taken on by these hedgers is sufficiently lower than the price risk they face, hedgers are willing to participate in futures markets as long as these markets are liquid. Why do hedgers need liquidity? This is because most participants do not hold contracts to expiration and instead offset their positions prior to delivery. While major agricultural futures contracts, such as those for corn, soybeans, wheat, and cotton, allow for physical delivery, less than 1% of all futures contracts are settled this way in practice.

Table 1. Annual Sugar and Cotton futures volumes vs. delivery for the period 2008–2024.

	Sugar No. 11			Cotton No. 2
Year	Futures Volume	Delivered	%	Futures Volume	Delivered	%
2008	27,019,704	47,795	0.18%	6,162,963	18,225	0.30%
2009	27,300,259	66,754	0.24%	3,574,995	3409	0.10%
2010	29,133,632	38,248	0.13%	5,732,906	13,716	0.24%
2011	24,629,369	45,010	0.18%	5,288,454	6992	0.13%
2012	27,126,728	64,212	0.24%	6,130,362	2910	0.05%
2013	29,813,680	63,396	0.21%	6,155,024	8161	0.13%
2014	27,396,597	27,700	0.10%	5,787,883	3626	0.06%
2015	34,394,482	90,316	0.26%	6,726,586	896	0.01%
2016	33,115,334	59,021	0.18%	7,318,168	1272	0.02%
2017	30,961,148	106,465	0.34%	7,907,507	2603	0.03%
2018	37,011,007	47,495	0.13%	8,876,095	2633	0.03%
2019	37,687,885	66,681	0.18%	8,461,449	1633	0.02%
2020	39,949,270	119,859	0.30%	8,324,233	1278	0.02%
2021	31,002,757	35,961	0.12%	8,501,710	471	0.01%
2022	32,750,113	53,519	0.16%	8,384,983	196	0.00%
2023	38,460,296	94,633	0.25%	9,479,163	1009	0.01%
2024	35,077,709	113,448	0.32%	11,338,336	800	0.01%

Source: ICE Futures US.

reports data on deliveries as a percentage of contract volume for the Cotton No. 2 and Sugar No. 11 futures contracts. In every year, the percentage of contracts settled by delivery is much less than 1%. This low delivery rate does not reflect a weakness of the system but highlights the market’s efficiency in providing liquidity and risk transfer without requiring physical delivery. Thus, hedgers need to be able to trade out of the contract conveniently and at low trading (transaction) costs (In February 2025, the Chicago Board of Trade (CBOT) initiated trading in five “Micro” contracts. These contracts are for Corn, Wheat, Soybeans, Soybean Meal and Soybean Oil. Each of these micro contracts are 10% of the size of the existing futures contracts. The micro corn contract is 500 Bushels or 10% of the 5000 Bushels regular contract. These contracts are cash settled to the larger contract, precluding the ability to make or take delivery of the micro contracts. The smaller size of these micro contracts will result in smaller initial margin. They will also require smaller liquidity lines of credit, as the daily variation margin flows will be 1/10th the size of the standard contracts. The smaller size of the micro contract will make it easier for smaller farms in the U.S. to use these contracts to hedge price risk. Since these contracts are cash settled, there is no concern about making or taking delivery. For more information, please visit https://www.cmegroup.com/markets/agriculture/micro-ag-futures.html, accessed on 15 May 2025). As liquidity is lost, trading costs begin to rise to the point where they may outweigh any of the resulting benefits that arise from exchanging commodity price risk for basis risk.

From the hedgers’ perspective, derivatives markets reduce cash flow volatility and stabilize income, strengthening farmers’ financial profiles and facilitating access to credit [25,32]. As derivatives markets continue to expand, especially in the developing world, they have the potential to improve the financing environment for farmers who need to fund inputs and operations across the production cycle. The presence of these markets can help mitigate challenges, such as asymmetric information about the borrower and weak enforcement of contracts [24], by reducing price risk and increasing financial visibility. Participation in these markets can thus lower perceived lending risk, potentially making agricultural lending more attractive to financial institutions [32]. This, in turn, supports high agricultural investment and lending, contributing to greater agricultural productivity and food security [25,32] (We thank an anonymous referee for highlighting the important limitation that financial (il)literacy, particularly among small-scale farmers, can constrain effective use of derivatives markets. This limitation cannot be addressed by market mechanisms alone but requires coordinated efforts involving governments, regulators, financial institutions, and development agencies [23,24]).

2.1.2. Investors

The second group consists of investors, who assume the price risk from the hedgers. These investors care nothing about basis risk since they, by definition, do not have a physical commodity position. They have neither the ability nor the facilities to make or take delivery. For them, the ability to trade in and out of contracts with little transaction costs is therefore paramount. As liquidity is lost, greater expected profits are needed in order to cover the increasing transaction costs. Thus, at lower liquidity levels, there will be fewer investors, which will in turn reduce the ability of hedgers to exchange their commodity price risk for basis risk. If liquidity is sufficiently low, investors will refuse to participate altogether.

One cost-efficient way for investors to gain exposure to commodities is through long-only commodity funds. These funds provide investors with diversified long positions across a range of liquid futures contracts, typically spanning several commodity groups, such as energy, agriculture, and metals. Fund weights are generally determined by metrics such as production, consumption, and futures trading volume, and are periodically rebalanced. This rebalancing process often leads funds to sell outperforming contracts and buy underperforming ones, a dynamic that contributes to mean reversion and can help dampen excessive price volatility in commodity markets.

Long-only funds do not typically employ leverage and are structured to offer exposure to commodities as a distinct asset class. Their low correlations with traditional assets such as equities and fixed income [35], as well as with inflation indicators [36,37], suggest that they offer meaningful portfolio diversification benefits. While some earlier studies note that these benefits may vary depending on market conditions, investor type, and index structure (e.g., [38,39]), more recent research continues to highlight the potential advantages of long-only exposure, particularly for long-horizon and institutional investors in segmented markets and periods of macroeconomic uncertainty (e.g., [40,41]). Rather than engaging in short-term speculation, these funds maintain long-term positions, making them natural counterparties to producers seeking to hedge their output.

2.2. Financialization of Agricultural Commodity Futures Markets

There is an ongoing debate regarding whether financial investors in food commodity derivative contracts are responsible for artificially inflating the price of basic food commodities underlying these contracts (a recent review of the literature can be found in [42]). While some studies argue that financial investor positions tend to covary with commodity prices (e.g., [10,43]), others find no causal link between institutional investor flows and price spikes during key periods such as 2006–2008 (e.g., [32,44,45,46,47]). Later surveys of the literature similarly reflect this division: [11] conclude that the empirical evidence linking index fund positions to commodity prices is generally weak, while [12] find that results vary depending on the method and measure used, with weaker support for negative impacts when direct measures of speculation are employed. Together, these studies reinforce the idea that the literature remains unsettled.

In response to the volatility and concerns raised during the 2007–2008 food crisis, regulatory authorities introduced reforms designed to strengthen derivatives markets [48], including enhanced transparency and limits on speculative positions [23] (While speculative position limits already existed for several legacy grain contracts, the Dodd-Frank Act (2010) expanded the CFTC’s authority to establish new and updated federal limits across a wider set of physical commodities. Legal challenges delayed implementation, but a revised rule was finalized in 2020 and took effect in 2021. These reforms also enhanced transparency through stricter reporting and surveillance of large trader positions starting in 2011. For more details, see the CFTC’s overview on Position Limits for Derivatives (https://www.cftc.gov/LawRegulation/DoddFrankAct/Rulemakings/PositionLimitsforDerivatives/index.htm, accessed on 4 August 2025) and the CFTC’s overview on Large Swaps Trader Reporting (https://www.cftc.gov/LawRegulation/DoddFrankAct/Rulemakings/XXXII.LargeSwapsTraderReporting/index.htm, accessed on 4 August 2025)). These post-crisis changes provide important context for interpreting the empirical record and suggest that the structure and oversight of today’s markets differ meaningfully from those in the period under debate.

Recent evidence also shows that the correlation between commodity futures and traditional financial assets has generally increased over time due to financialization [8], but it tends to weaken significantly during periods of elevated credit risk [41]. During such times, commodity futures regain their diversification potential, offering investors protection when it matters most. Accordingly, agricultural futures continue to play a valuable role in portfolio risk management without contributing to excessive price volatility [40].

We believe that much of the criticism directed at financial investor participation stems from a limited understanding of the actual functions these investors perform. Agricultural futures contracts exist to mitigate commodity price risk and, equally importantly, to provide a transparent price for all participants [25,26]. In this way, they play a critical role in the agricultural production process and in supporting price stability, particularly during periods of market distress [12]. Speculators, in particular, enhance the price discovery function of futures markets by improving the incorporation of new information, reducing noise in price signals, and increasing market efficiency [49,50]—a finding that aligns with a broader body of research underscoring the informational and liquidity benefits of speculative activity. If interventions were to significantly limit the involvement of these important liquidity providers, the cost of risk mitigation could rise. All other things being equal, such a development might reduce farmers’ ability to manage price risk and contribute to upward pressure on food prices—effects that could disproportionately impact the poorest populations. This view is increasingly echoed in both academic (e.g., [11,41]) and practitioner circles (e.g., [51,52,53,54]). Notably, the Handbook on Sustainable Investments [55] concludes its section on commodities by stating: “Excluding commodity derivatives is not recommended due to the fact that lower liquidity generally limits commercial hedgers’ ability to insure price risk, which is a vital element in global food security” [55] (p. 131). Accordingly, undermining the role of financial investors in these markets carries the risk of making risk mitigation more costly and less accessible, with potentially harmful consequences for both farmers and vulnerable populations, who rely on stable and affordable food prices.

2.3. Environmental and Social Risks

Risks associated with agricultural commodities and investments linked to them take two forms. One form involves the growing challenges of climate change, which further underscore the need for effective price risk management [56]. Severe weather events such as droughts, floods, and heatwaves are already reducing land productivity, leading to lower agricultural yields and greater price volatility. According to the Intergovernmental Panel on Climate Change (IPCC), global warming of 2 °C or higher will significantly escalate food security risks, particularly in vulnerable regions like Sub-Saharan Africa and South Asia [57]. However, U.S. agricultural production is not immune to these risks. Climate-driven disruptions, such as prolonged droughts in key farming states and increased pest pressures, threaten to weaken domestic yields and contribute to global food supply instability. This reinforces the importance of agricultural futures markets in managing price risks, ensuring resilience in U.S. farming operations, and supporting global food security efforts.

The other—and increasingly important—form of risk concerns the environmental and social impacts that may arise from investments in agricultural commodities themselves. Critics argue that financial investments in food and agricultural derivatives may indirectly contribute to adverse outcomes, such as deforestation, biodiversity loss, land grabs, and labor exploitation [58,59]. Ref. [60] points to a broader problem of “financial distancing,” whereby financial instruments, such as index funds and derivatives, separate investors from the on-the-ground consequences of their capital. This distancing complicates accountability and blurs the link between financial flows and tangible environmental or social harm.

While these concerns are important, they must be assessed in light of the regulatory context. The United States enforces strict—though certainly not perfect—standards through agencies such as the USDA and EPA, which address labor conditions, environmental impacts, and production practices. Additionally, only commodities produced in the United States are eligible for delivery under most U.S. agricultural futures contracts, meaning that the social and environmental context of production is subject to a robust governance framework. This adds a degree of accountability and traceability that helps address many of the ESG-related concerns raised in the literature.

As agricultural futures markets become increasingly vital for managing climate-driven risks and supporting global food security, it is essential that regulatory interventions strengthen—rather than undermine—their core functions. Policies that inadvertently discourage institutional investor participation or reduce market liquidity may weaken the very mechanisms that enable effective risk transfer and price discovery [11]. As [61] caution, such missteps may have lasting consequences and prove difficult to reverse. Regulatory efforts should therefore be designed with a clear understanding of how these markets operate and how they contribute to broader goals, including SDG #2 ending hunger and ensuring food security.

As Nobel Laureate Amartya Sen emphasized, food insecurity is not solely about the availability of food but often about access to it, particularly for vulnerable populations [62]. In this context, agricultural futures markets are not a panacea for addressing all food security challenges. However, by enabling better management of price risks and resource allocation, these markets can play an essential role in stabilizing food supply chains and mitigating some of the pressures caused by climate change and market volatility. While broader systemic solutions are required to ensure equitable access to food, the efficiency and liquidity provided by agricultural futures markets can help channel resources toward addressing the structural barriers to food security.

3. Do Farmers Use Commodity Derivatives Markets?

A question relevant to our assertion about the importance of forwards, futures, and options contracts as a risk management tool is their use by farmers. To answer this question, we look at two reports that specifically examine farm use of derivatives: USDA’s Farm Use of Futures, Options, and Marketing Contracts [63] and McKinsey and Company’s Voice of the US farmer in 2022: Innovating Through Uncertainty [64].

For this discussion, marketing contracts will be considered a form of a forward contract as per [63]: “A marketing contract sets a market outlet, a quantity to be delivered, and a price or pricing formula for a commodity. … In one type of marketing contract—a forward contract—a specific price is agreed upon in the contract” [63] (p. 9). Other types of marketing contracts tie the price to a futures contract or related index with premiums or discounts depending on quality and location [65].

The USDA conducts an annual survey (Agricultural Resource Management Survey [ARMS]) on various aspects of farming [66] (For details on the USDA ARMS, see https://www.nass.usda.gov/Surveys/Guide_to_NASS_Surveys/Ag_Resource_Management/, accessed on 7 July 2025. Data for earlier years, including those used in this study, are discussed in [63] and are also available upon request from the USDA Economic Research Service (ERS)). In 2016, the ARMS included specific questions on risk management practices of farmers, and the results were analyzed in detail by [63]. According to their analysis, futures contracts were used by 39,843 farms, with 94% hedging soybeans and corn. Marketing contracts were used by 156,395 farms, with 58% of those contracts for corn and soybeans. The use of futures is notably skewed towards larger farms, with 27.1% of large corn and soybean farmers using futures. Futures contracts manage risk in 41.1% of corn production and 47.2% of soybean production. Supporting these findings, the McKinsey study similarly reports that larger farms are more likely to use financial markets to hedge [64].

In addition to size, the use of futures contracts is influenced by the age and education level of the farmer and debt-to-asset ratio [63] (p. 32). The younger the farmer and the more years of education, the higher the use of futures. As with broader patterns in futures market participation, higher leverage, reflected in the debt-to-asset ratio, appears to encourage greater use of risk-mitigating strategies like futures. Farms that take on debt to expand their footprint must meet their debt obligations, which may lead them to hedge all or part of their production.

Forward contracts are extensively used in corn and soybean markets [63] (p. 16). In corn, 21.7% of farms use forward contracts, covering 42.3% of U.S. corn production. In soybeans, forward contracts are used by 24.8% of farms, representing 53.3% of U.S. soybean production. Farmers sell their crops for delivery at a future date, with the pricing formula determined at the time the contract is signed. The buyers of these contracts, such as grain elevator operators and commercial processors, then assume the price risk. As noted by [63] (p. 10), “They often manage that price risk by hedging in the futures markets.”

Ref. [63] (p. 25) employed a logit regression model to examine the impact of adding variables such as farm size, farm income, education level, etc., to empirically examine how adding variables changed the probability of using futures. Among large farms with $2 million in sales, the likelihood of using futures contracts increased significantly—from about 1 in 5 (20.9%) to nearly 1 in 2 (48%)—when farmers also used marketing (forward) contracts. A similar proportional increase was observed across other farm income levels, underscoring the strong association between the use of marketing contracts and futures market participation.

3.1. Hedging and Financing

The relationship between hedging and financing has been well established in academic finance literature [67,68]. The arguments focus on the fact that hedging reduces the bankruptcy risk, agency costs, information asymmetry, and volatility of a firm’s cash flow, which increase the ability of the firm to take on more debt and take advantage of profitable investment opportunities. One argument is that less volatile cash flow increases the probability of having sufficient free cash flow to invest in projects with returns in excess of capital cost without having to access the external capital market [69]. Another approach leads to a similar result: the ability to invest in more projects that return more than the cost of capital to support them. Here the argument is that hedging signals to both the debt and equity markets the willingness of the firm to manage risk. This leads to debt holders being more willing to extend credit, allowing for more investment [70].

This is a settled issue in finance, but what does it specifically mean for agricultural hedgers? On 30 March 2020, the Office of the Comptroller of Currency (OCC) issued the fifth edition of the Comptroller’s Handbook on Agricultural Lending [71]. This Handbook explains to banks supervised by the OCC the issues that those banks should address as part of their lending procedures including hedging using futures contracts [71] (pp. 17–18). In other words, the federal banking regulator of national banks is telling banks that one way to mitigate commodity price risk is to encourage the use of futures contracts by agricultural borrowers. The symbiotic relationship between hedging and financing is central to the ability of farmers to manage their cash flow over the growing cycle.

This is true even when the farmer does not directly hedge in the futures market. The corn farmer could sell forward, using marketing contracts, his corn crop to his local elevator operator, locking in a price on some or all of his estimated production. He takes the forward sale contract and other documents to the local bank and gets the loan he needs to buy the seed and fund operations until harvest. The loan provides the working capital during the crop cycle. The farmer hedged in the forward market, but not the futures market. Or did he? The corn elevator operator is now committed to buying the farmer’s corn at the agreed-to price. What happens if that price goes down? The elevator operator is now at risk. The author hedges that by selling corn futures for delivery around harvest time [71] (p. 17). If the elevator operator could not mitigate his risk, the author would be far less willing to provide the farmer with a forward contract at a fixed selling price. No forward contract means more credit risk to the bank, resulting in either a smaller loan, a more expensive loan, or both.

The farmer participates in the corn futures market either directly or indirectly—typically through an intermediary such as an elevator operator. But who takes the other side of the farmer’s position? Reviewing the Commodity Futures Trading Commission (CFTC)’s Commitments of Traders reports for corn, wheat and soybeans, we find that the long positions—the other side of the trade—are typically held by financial investors (https://www.cftc.gov/MarketReports/CommitmentsofTraders/index.htm, accessed on 5 July 2025). These include long-only commodity funds, which provide the risk-bearing capacity that enables farmers to hedge effectively. Reducing the participation of financial investors, such as long-only funds, would diminish the availability of hedging services or increase their costs.

Risk mitigation is the core function of each futures contract, from corn to cotton. A well-designed and well-functioning futures contract requires non-hedger participation. Without that participation, hedging becomes either less available or more expensive or both. Without hedging, agricultural lending is either more restrictive or less available. Without financing, farming becomes even more risky, resulting in lower supply and higher cost. By facilitating risk transfer and improving financing conditions, futures markets ultimately support more stable food and fiber supplies—contributing to food security and access to basic necessities such as clothing.

3.2. Commodity Futures Are Not Places Where Individuals Buy and Sell Physical Goods

There is another significant misunderstanding about agricultural futures markets. Futures markets are not designed to be physical (cash) markets. Futures contracts are designed for price discovery and price risk management. For a new contract to be approved by the CFTC in the United States (the federal agency charged with oversight of futures markets), the contract must demonstrate that it enhances price discovery and supplies risk management services [72]. Futures markets were not designed to be a place to make or take physical delivery of a commodity. Consequently, it is no surprise that less than 1% of all futures contracts result in delivery, as shown in Table 1 above.

The financialization of agricultural futures markets has in some cases raised unfair concerns around the fungibility of commodities being traded in derivatives markets in that it is almost impossible to distinguish, for example, sustainably produced cotton from other cotton in these markets [60]. However, a closer look at the fundamental dynamics of commodity futures markets will reveal that this matter is inherent in the universal nature of commodity futures contracts. The fact that many kinds of cotton, including organic cotton, are deliverable against the cotton futures contract reinforces the point that agricultural futures contracts are designed to reflect the cotton market in general. The terms and conditions of the cotton futures contract, including the delivery locations and contract-specified grade differentials, explain what Table 1 reports: futures markets are not used as a place to make or take delivery but to mitigate risk and facilitate crop financing, both of which greatly facilitate the crop cycle. Farming is a risky business and commodity futures help reduce two of the many risks farmers face: price risk and liquidity risk.

A successful futures contract links all grades of a commodity via the (basis) relationship between the price of the commodity as per the futures contract and the price of the commodity in a local market. The nature of the futures contract precludes the ability to trace a particular bale of cotton or bushel of wheat to a particular farm. An individual farmer can monitor and control how the farming is carried out, as in the process of growing organic cotton. A futures contract, which permits the delivery of any grade that satisfies the terms of the contract, precludes such specific precision. However, this design is intentional: contracts are structured to reflect the entire deliverable range of the commodity, capturing broad market conditions rather than specific production methods.

Commodity futures contracts were not designed for a just-in-time inventory system either. If there are options in the contract as to what, where, and when delivery takes place, they typically belong to the person making the delivery. All physically delivered contracts have an extended delivery period, often an entire month. Therefore, the person receiving the goods would not know when a delivery would take place. For example, if corn is needed to make corn flakes, the production process cannot wait for delivery. A corn futures contract is used to mitigate the price risk, but not to source material.

Delivery locations for a futures contract are also limited. For the corn futures contract, delivery points are designated warehouses along the Illinois–Mississippi River. If you are not near one of those locations, it is not practical (economically) to make or take delivery. Moreover, most futures contracts allow for several different grades to be delivered to satisfy a futures contract. For example, the corn futures contract allows USDA specified No. 1, 2, and 3 corn to be delivered in satisfaction of a short position in corn futures. Each grade has slightly different physical characteristics (protein content, moisture, etc.). Sophisticated production processes cannot buy in a market where there is uncertainty regarding what grade of a commodity, and when and where you will receive the commodity. Commercial firms rely on established supply channels that allow them to specify exactly the “what, when, and where” of the commodity they require.

However, the lack of deliveries is often misconstrued as suggesting low commercial participation in the markets. As the Commitments of Traders statistics produced by the CFTC make clear, there is always significant commercial market participation in every US commodity futures market, both as buyers and as sellers of commodity futures contracts. Even though the vast majority of futures contracts are settled by a reversing trade, the ability to deliver is still very important. This ability to deliver ensures that, at delivery, the futures price and cash price converge. If there is a discrepancy, there is an arbitrage that will force convergence. The fact that the cash and futures converge is critical to the risk management function of futures markets. The hedger wants to be able to offset any gain or loss on a cash position by an equal and opposite loss or gain on the futures position. The hedger wants to lock in a price for a cash position. The futures and cash price must converge. If they do not, the hedge will not work properly.

This raises another important issue. Hedgers often have a physical commodity position with characteristics that may be slightly different than the grade deliverable under the futures contract. This could be a quality difference or a location difference. The fact that the futures contract prices a physical commodity with some differences from a particular commodity is a concern. However, it is a manageable concern. Commercial market participants know the relationship between the price of the commodity underlying the futures contract and their local cash position. Their knowledge of local market conditions and relationship with the futures market gives them an information advantage.

3.3. Futures Exchanges Do Not Unilaterally Specify Product Standards

Futures exchanges recognize the need to balance many different issues when offering a futures contract to the market. One of these is that there are a number of different grades in the commercial market for each physical commodity. The importance of a particular grade evolves as commercial practices change.

The process of modifying a futures contract requires substantial industry consultation. Industry consultation is typically channeled through a committee of market participants. When a contract modification is recommended by an industry committee, it is reviewed by the staff of the Exchange and sent to the Board of the Exchange for approval. If approved by the Board, the change to the terms and conditions of the contract is then sent to CFTC, which has the ability to reject the change. The following examples of recent changes to existing futures contracts will make clear why the changes were proposed and approved.

In the summer of 2017, Intercontinental Exchange (ICE) Futures US submitted to the CFTC amendments for the Cotton No. 2 futures contract [73]. The change to the rule allowed for an additional premium for cotton with a staple of 37 or higher delivered on the Exchange. The facts in support of this submission demonstrate how the terms of a futures contract evolve to reflect changes in the cash market for the commodity in question.

The length of a cotton fiber is one determinant of the quality of the cotton, which is measured by the staple. The premiums for longer fibers (higher staples) are established by the USDA. Even though the USDA reports premiums for staple 37, or higher, the Cotton No. 2 futures contract only recognized premiums for staple 36 [73] (p. 1):

“Deliveries of 37 and higher staple, which had historically represented a small percentage of the overall supply, are currently invoiced using the USDA premium for 36 and higher staple difference, receiving no additional premium against the No. 2 Contract.

According to USDA data, the share of US production with a Staple of 37 or higher was 29.6%, 37.4% and 46% over the past three crop years. As cotton with a staple of 37 or higher now represents a significant percentage of the supply, the Exchange is amending Rule 10.22(e)(i) to cause the delivery terms for the Cotton No. 2 contract to more closely match commercial market terms.” (italics added)

As the overall characteristics of the cotton grown in the United States improved, the Cotton No. 2 futures contract was modified to reflect the new reality in the market for cotton. The difference under the new rules is that staple 37 would command the same premium in the futures market as the premium available in the cash market.

Another example occurred in the spring of 2013. ICE Futures US amended their Sugar No. 11 futures contract [74]. The quality of the sugar is determined by its sucrose content as measured by the degree of polarization. The higher the degree of polarization, the more valuable the sugar is. The amendments in [74], which were adopted by the World Sugar Committee and approved by the Board, provided for a larger premium for sugar with a polarization between 99.1 and 99.2 degrees and smaller premiums for delivery of sugar with polarization between 96.0 and 98.9 degrees: “The amended premiums were unanimously adopted by the World Sugar Committee and are believed to better reflect the present value that higher polarization provides to receivers of Sugar No. 11 and the fair compensation for the extra costs incurred by the deliverers in producing such product” [74] (p. 1).

On March 28, 2025, ICE Futures US submitted a rule change request to the Commodity Futures Exchange Commission [75]. The rule change raised the minimum polarization (sugar content) to 97.0 degrees for the Sugar No. 11 contract. This change was recommended by the Exchange’s World Sugar Committee, approved by the Board of the Exchange, and then submitted to CFTC for their approval. The quality of sugar produced for export has materially improved and the futures contract needs to be updated to reflect the higher quality sugar in the cash market.

The quality of the sugar being produced improved over time. The terms of the futures contract were adjusted to reflect the new commercial reality. In both of the above cases, the terms of a successful, liquid futures contract were modified to better reflect the new reality in the cash market. As the quality of the physical characteristics of the cash market improved, the contract was modified to reflect those changes. The futures contract is a lagging indicator of cash market practice.

While it is important to understand why contract terms are adjusted over time, it is equally important to understand that all cotton or sugar market participants can use the futures markets to hedge. The producer or consumer of cotton or sugar knows that their particular grade of cotton or sugar might not exactly match the characteristics of the futures contract. They know there could be some differential between the price of the futures market and the price of their commodity. The overall risk of the underlying commodity is hedged and the differential between the grades is managed.

The amount of organic cotton produced in the United States is small but growing. The Agricultural Marketing Service (AMS) of the USDA already gathers information on the number of bales of organic cotton and the price per pound of that organic cotton [76]. If, at some time in the future, organic cotton became a more significant percentage of production, the terms of the cotton contract would likely be modified to reflect that new cash market reality. In the meantime, producers of organic cotton can use the existing cotton futures contract to hedge cotton price risk, while continuing to manage the basis between organic and nonorganic cotton. In fact, there is nothing to prevent organically grown cotton from being delivered today.

4. U.S. Agricultural Futures as a Sustainable Investment

Sustainability is an important concept for the world in general and for responsible investors. As the ESG landscape continues to evolve [77], sustainable investing has emerged as a dominant theme in global capital markets over the past decade. Today, institutional investors and financial institutions increasingly consider ESG risks as part of their investment and credit decisions [78]. While sustainable investing is motivated by a range of factors, including shareholder welfare [79], long-term financial value [80], and social norms [81,82], Ref. [77] classifies these into two broad categories: financial value and investor values. Growing concerns about global food security and the sustainability of agricultural systems, including biodiversity loss and ecosystem degradation, relate to both sets of motivations and increasingly shape institutional investor behavior [83,84]. In this context, U.S. agricultural futures markets represent a credible and practical option for investors seeking to align their portfolios with sustainability goals, including food security and SDG #2.

The sustainability case for U.S. agricultural futures markets rests on a well-established and transparent regulatory framework governing both agricultural production and futures delivery mechanisms. While these contracts do not impose specific production standards themselves, the delivery mechanisms effectively ensure that the physical commodities originate from within the U.S. regulatory system (see, for example, [85] for a detailed explanation of the U.S. corn delivery process). In this way, the regulatory structure helps bridge the information gap that might otherwise arise from the fungibility of commodities and lack of traceability to specific farms. For instance, although we may not know whether a bale of Cotton No. 2 was grown organically, we do know that child labor was not involved. We know there is no insect infestation. We know that basic human rights were not compromised in the production or distribution of cotton. We know these things because the terms and conditions only allow for cotton grown in the United States to be delivered. Thus, the cotton eligible for delivery is grown under the rules and regulations of the United States, which has laws concerning child labor, water use, and fertilizer use, among others. Each baled cotton is inspected and certified by the USDA, offering objective assurance regarding contract compliance and production standards. The farms operate under the rules of the state and county in which they reside. The general regulatory umbrella in the United States gives us a significant, though not complete, level of confidence in the social and environmental context of production. The same conditions would apply to all the U.S.-sourced agricultural commodities in addition to cotton. Thus corn, wheat, soybeans, soybean meal, soybean oil, oats, and rice, all benefit from the umbrella of regulations that control how and by whom agricultural commodities are produced. For investors, this structure offers a way to contribute to sustainability objectives, particularly those related to food security, through instruments that also enhance price stability, risk management, and market transparency.

This is not to say that these laws and regulations are perfect, or that improvements could not and should not be made. However, it would equally be a mistake to overlook the strength of the legal and regulatory framework that underpins U.S. agricultural production—particularly when considered alongside the clear and unambiguous risk management benefits of agricultural futures contracts. The 2024 Environmental Performance Index (EPI), produced by the Yale Center for Environmental Law and Policy, ranks the United States first globally in the agriculture issue category, reflecting its progress in balancing high crop productivity with environmental responsibility [86] (“The United States of America, the top-performing country, has made progress toward balancing agricultural productivity and the minimization of environmental harm. The United States has reached maximum attainable crop yields while scoring high in the phosphorus surplus indicator and in the Sustainable Nitrogen Management Index, which combines metrics of yield and nitrogen use efficiency [87]. However, the United States scores only 57.8 in pesticide pollution risk, ranking 99th worldwide and demonstrating that no country has managed to achieve high agricultural productivity with minimum pollution and environmental degradation” [86] (p. 117)). While gaps remain, this performance underscores the broader point: U.S.-sourced agricultural commodities benefit from a regulatory environment that provides meaningful protections and performance standards across economic, labor, and ecological dimensions.

Critics have also questioned whether food and agricultural derivatives can truly be considered sustainable investments, arguing that financialization leads to excessive speculation, detachment from physical market fundamentals, and increased volatility, among other concerns [60]. Ref. [60] specifically cautions that private financial actors, driven by financial priorities, may exacerbate instability in global food systems and undermine sustainability objectives—a claim widely disputed by a growing body of empirical evidence (see Section 2.2: Financialization of Commodity Futures Markets for a brief review). The author also highlights the complexity of agriculture-based financial investments and expresses skepticism about the sufficiency of voluntary frameworks for responsible investment, such as the Principles for Responsible Investment in Agriculture and Food Systems, particularly due to their reliance on self-regulation and transparency mechanisms. However, such concerns have not been consistently borne out in practice and should not preclude recognition of the stabilizing and risk-mitigating functions of well-regulated futures markets, particularly for responsible investors seeking meaningful sustainability alignment.

5. Conclusions

This paper contributes to a growing body of literature exploring how financial instruments can be evaluated through the lens of sustainability. We examine the case of U.S. agricultural futures markets and argue that their institutional design, regulatory safeguards, and role in supporting agricultural production justify their treatment as qualified sustainable investments. The current limitations in tracing bulk agricultural commodities to a precise geographic origin led us to focus deliberately on contracts that permit delivery only from within the United States. The practical realities of these contracts regarding underlying commodity fungibility also mean that evaluating the sustainability of agricultural futures contracts must focus on their structural design as well as economic and practical functionality. Our goal in this paper is to articulate how these features position agricultural derivatives as relevant tools within the broader sustainable finance agenda.

Our analysis draws on the rules and regulations that govern U.S. agriculture, and the derivative contracts tied to it. This approach leverages the relatively strict, though not perfect, U.S. regulatory framework as a basis for asserting a meaningful level of environmental and social safeguards embedded in the underlying production. The regulatory environment in the United States, covering both agricultural production and the design and oversight of futures contracts, offers reasonable sustainability safeguards. These include labor protections, environmental standards, market transparency requirements, and delivery mechanisms governed by the CFTC and the USDA, among others. The contract specifications governing delivery ensure that agricultural commodities meet defined standards for origin, quality, and production practices, adding an additional layer of confidence for sustainability-minded investors. Equally important, the structure of these contracts evolves in response to developments in the underlying cash markets—illustrated by historical adjustments in U.S. cotton and sugar contracts—demonstrating the system’s ability to remain aligned with production realities and market needs. Considering these institutional features, U.S. agricultural futures markets should be seen not merely as instruments for hedging, but as structured environments that coherently and practically link producers, financial markets, and sustainability objectives.

Agricultural futures markets perform essential financial functions that extend beyond those of cash (spot) markets. By facilitating price discovery, risk management, and supporting credit access, these markets provide critical tools for producers, elevator operators, and traders to manage uncertainty across the agricultural supply chain. Their role in generating forward-looking price signals and offering hedging opportunities is particularly important in agriculture, where production cycles are long and growing conditions inherently uncertain. These functions also enable more efficient crop and harvest financing, improving liquidity and planning certainty for farmers and agribusinesses. In this way, well-functioning futures markets support not only the economic stability of agricultural producers but also broader goals, such as enhancing global food security—an objective embedded in SDG #2: Zero Hunger.

We recognize, however, that empirical analysis would be a valuable complement to this conceptual contribution. Future research could analyze the effects of agricultural derivatives on farm productivity, income stability, access to credit, and ultimately food availability and affordability—key pillars of food security and core elements of SDG #2: Zero Hunger. In addition, researchers may investigate whether other agricultural futures markets, such as those in select European countries like France, exhibit similarly robust regulatory structures and contract designs that could justify a comparable sustainability designation. By clarifying how these features shape investment impacts and production incentives, this paper lays the groundwork for future studies to test and refine the theoretical mechanisms outlined here using farm-level, market-level, or investor-level data.