Grain Price Risk Management
Futures and options have traditionally been used by commodity crop farmers to help mitigate risk in their production operations. However, these same tools can be used by specialty crop producers. Although specialty grain contracts may specify a fixed price, more often the price is specified as a premium to local cash prices or futures prices. So specialty grain producers are vulnerable to commodity price volatility.
Specialty grain producers can use the same futures and options tools used by commodity producers. If your contract price is specified as a premium to the local cash price, you need to adjust your results by the size of the premium. For example, if you estimate that you can hedge commodity corn for $3.00 and your specialty contract designates a 30 cent premium over local cash price, you simply add 30 cents for an estimated price of $3.30. If you estimate you can place a floor price under commodity corn at $2.70 by using the options market, the floor price for your specialty corn is $3.00.
If your contract specifies your price as a premium to futures price, the process is simplified because you don’t need to adjust for basis.
Hedging is a useful tool in mitigating price risk. Grain Price Hedging Basics provides you with an understanding of how to use this tool. Using Hedging in a Grain Marketing Program shows you how to integrate hedging into your marketing program.
Another useful tool is the options market. Grain Price Options Basics provides you with an understanding of how this tool is used. Options Tools to Reduce Price Risk can protect against an unfavorable price movement while leaving you open to benefit from a favorable price movement. Options Tools to Enhance Price can actually increase your price level while protecting against adverse price movements. Grain Price Options Fence is another useful risk mitigation tool. Commodity Grain Marketing Terms and Specialty Grain Terms will increase your understanding of grain marketing.
Regardless of what risk management tool you use, a thorough understanding of Corn and Soybean Price Basis is critical if you are using these or similar grains. Historic Corn Price Basis levels and Soybean Price Basis levels for Iowa provide you with important information for predicting future basis movements. More Iowa information on basis is available in July Corn Price Basis and July Soybean Price Basis.
For more information on this topic, see the links listed below of articles posted on related Web sites.
Futures and Hedging
- Introduction to Futures Markets – Texas A & M University Extension – Futures trading has a long history in the U.S. and in the world.
- Selling Hedge with Futures – Texas A & M University Extension – Use a selling hedge to reduce the risk of price declines.
- Buying Hedge with Futures – Texas A & M University Extension – Many agricultural products require risk management tools to stabilize input prices.
- Hedging Milk with BFP Futures and Options – Texas A & M University Extension – Since the 1996 farm bill, milk prices have become more volatile.
- Milk Futures, Options and Basis – Texas A & M University Extension – Hedging with futures and options can reduce milk price risk.
- Introduction to Options – Texas A & M University Extension – Options provide a flexible marketing tool to manage risk.
- Hedging with a Put Option – Texas A & M University Extension – Put options are a flexible marketing tool.
- Using Options to Hedge Farm and Ranch Inputs – Texas A & M University Extension – Call options are a flexible marketing tool.
- The Window Strategy with Options – Texas A & M University Extension – Putting limits on prices advances and declines can manage risks.
- Using a Bear Put Spread – Texas A & M University Extension – A spread is a tool to reduce the price of an option.
- Using a Bull Call Spread – Texas A & M University Extension -- A spread is a tool to reduce the price of an option.
- Rolling up a Put Option as Price Increases – Texas A & M University Extension – A tool for improving your minimum price.
- Factors Affecting Option Premiums – Texas A & M University Extension – Understanding option premiums help you to use them wisely.
- Knowing and Managing Grain Basis – Texas A & M University Extension – Differences in grain prices are due to surpluses and deficits of grains.
- Livestock Basis – Texas A & M University Extension – Knowing local basis is valuable when estimating purchase and sale prices.
- Crop Basis – University of Illinois.
- Basis for Selected North Dakota Crops – North Dakota State University Extension – A knowledge of the basis is important to good marketing.