GRAINS OVERVIEW

Corn | Soy Bean | Wheat | Oats

The grain markets follow a fixed cycle of production, flowing from planting to harvesting at specific times of the year. During these stages of development, the crop is vulnerable to damage from the forces of nature.  During planting, too much rain fall can make field work difficult to impossible.  Late plantings can result in loss of acreage or late development which can result in a lower quality crop or lower yields.  Too little rain can prevent seeds from proper germination, resulting in loss of production as well.

Agricultural Futures
Agricultural futures are essential risk management tools used by agribusinesses to manage price swings within the commodity markets so that they have more control over their firm's bottom line.

If you're looking for a textbook definition, essentially agricultural futures are legally binding agreements, made through a futures exchange, to buy or sell something in the future. That "something" in context of the agricultural markets is usually a commodity such as corn, wheat, soybeans, oats, or any number of other commodities.

Futures contracts are standardized according to the amount of commodity being bought or sold, the expected time and place of delivery, and the quality of the product. In fact, futures contracts are standardized in every way except price. That's what makes them so attractive to those who want to plan ahead and protect themselves from dangerous price swings and to investors wanting to profit from market fluctuation

Agricultural Options ?
An agricultural option is a contract that conveys the right, but not the obligation, to buy or sell a futures contract at a certain price for a limited time period. The important words to remember from this definition is "...the right, but not the obligation..." Within those five words lies the beauty of options.

If you buy an option, you retain the right to "exercise" or use the option if it works to your advantage, but you are not obligated to do anything. An option seller, on the other hand, is obligated to buy or sell the underlying contract, at a certain price, if the option is exercised by the option buyer.

Market participants continue to be attracted to Chicago Board of Trade agricultural options because:
They're flexible. Under almost any market scenario imaginable--rising prices, falling prices, or even stable prices--ag options can help you achieve your investment or risk-management objectives.

They're versatile. Even if you don't have an opinion about market direction, you can profit from changes in market volatility, decreasing time to expiration, or any number of factors unique to options.

They offer agribusiness additional protection. Ag options offer price protection without limiting profit potential. For producers, that means obtaining protection against declining crop prices without giving up the opportunity to profit if crop prices increase. For grain elevators, that means expanding their contract offerings to farmers to include minimum and maximum price contracts, plus other "hybrid" type contracts. Grain merchandisers, processors, and other buyers can obtain protection against increasing prices and still benefit if prices fall.

They're liquid. Agricultural options draw on the strength of the Chicago Board of Trade--a market that not only is the world's leading futures exchange, but is the most liquid as well.

They offer limited risk. The agricultural community and investors can significantly reduce risk exposure with agricultural options. For instance, an option buyer's exposure may be no more than the premium paid to purchase the option. And, there are a variety of option spreads, straddles, and other strategies that entail strictly limited risk.

They're exchange traded. The audit trail systems maintained by regulated futures exchanges offer a degree of oversight that is unparalleled by any other marketplace.

To learn more, contact our professional consultants today: 1- 800-974-8744

Back to top