Agricultural Options As A Management Tool

Agricultural markets for commodities have tended to be unstable with high variability in prices received by producers from year‐to‐year. These conditions have always made production planning very risky over time. For this reason and others, since 1933, the federal government has supported commodity prices in one fashion or another at or near break even. Support programs have put pressure on the annual federal deficits and subsequently have added to the national debt. This paper investigates the use of private agricultural options contracts as a price risk management tool. Use of put options was compared for four commodities to the use of forward pricing, the use of cash prices at harvest and the use of futures as commodity pricing strategies. Private put options were found to be a useful alternative to the use of government prices upports in some commodity situations. The paper suggests that the use of option contracts provides additional flexibility in price risk management and in dealing with uncertainty. This knowledge was found to be especially useful in light of current cuts in federal price supports in current federal budgeting activity.