Which type of risk do forward contracts primarily help to mitigate?

Forward contracts are primarily used to mitigate market risk, which is the risk of price fluctuations in the market that can affect the value of agricultural products. These contracts allow a producer to lock in a specific price for their product at a future date, thus providing certainty and stability against unpredictable market movements.

By agreeing to a forward contract, producers can protect themselves from potential declines in market prices. This predictability allows for better financial planning and helps with budgeting for operations, as the producer knows the revenue they will receive regardless of market volatility at the time of delivery.

Other types of risks, such as production risk, refer to uncertainties related to agricultural yield due to factors like weather or disease. Financial risk relates to issues such as interest rate changes and funding availability, while personal risk involves individual circumstances that affect decision-making. Forward contracts specifically target the volatility of market prices, thereby minimizing the impact of market risk on agribusiness operations.