Commodity Options: A New Risk Management Tool for Agricultural Markets
Michael T. Belongia discusses the mechanics of trading in the agricultural options markets, scheduled to begin next year as a supplemental phase of a Commodity Futures Trading Commission pilot program. He finds that options trading will provide new hedging and speculative opportunities for farmers who produce grain and businesses that purchase grain as an input. Belongia demonstrates how options could be used as part of a farmer’s overall marketing strategy and how their use could affect income under various assumptions about market supplies and prices. The article concludes with a discussion of whether options markets would provide price insurance and liquidity to farmers more efficiently than current price support programs.