Most of our nation's agricultural producers have experienced significant volatility both in the prices they receive for the commodities they produce and in the prices they pay for inputs. In response to increased price volatility, a growing number of producers have included risk management strategies in their farm management planning in order to reduce exposure to potential losses from price changes. Although most economists agree that the use of risk management tools has advantages, it is important for producers to be aware of tax implications before implementing them.
First, the Internal Revenue Service (IRS) treats hedging activity differently than it treats speculative activity. According to the Oklahoma Cooperative Extension Service, the IRS defines a hedging activity as "a transaction that any taxpayer enters into in the normal course of the taxpayer's trade or business."
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