CME Group Says Producers Should Consider Options In Their Marketing Plan

As farmers are now planning for the year ahead, many are continuing to grapple with some of the challenges from last year, which offered more than one whipsaw event for producers to navigate. Tim Andriesen, Managing Director of Agricultural Products at CME Group says his biggest takeaway from 2021 is that price risk isn’t going away anytime soon.

“If tight fundamentals aren’t enough, uncertainty was a big theme again last year, with factors like the pandemic and severe supply chain disruptions helping contribute to elevated volatility, especially throughout key parts of the growing season. In fact, CME Group’s CVOL index that measures volatility across all of our agricultural products hit a high of 46% in June, primarily driven by corn. These were among the highest levels since 2008. As our customers navigated this volatility, we saw a record number of producers utilize the flexibility of options products to mitigate price risk, lock in margins and manage cash flows. Trading activity across our entire agricultural options complex reached an all-time high average daily volume of 274,000 contracts last year. A record amount of this volume came in the form of non-standard options – like our Short Dated New Crop and Weekly products. A record number of market participants are seeing the value of how these options fit into their marketing plan.”

For those not familiar with options, he went into more detail about how they fit into a marketing plan.

“Especially in volatile markets like these, which are also accompanied by high input costs, it is important to lock in profit when you can. Options enable producers to establish a floor price for their grains, with a known premium cost up front, still being able to participate if prices rally," Andriesen said. "However, premium costs tend to be higher when prices are extremely volatile, which is also when you need protection the most. To address this, we introduced Short Dated New Crop options. They expire earlier than traditional options which means that because there is less time value, the premiums are lower than standard options. Using them you could, for example, buy protection only through June if you are concerned if the crop will get planted. If in June you’re still concerned, you could buy an option to cover pollination. Overall, they provide the producer much more flexibility to manage risk during specific windows of the growing season.”

Andriesen said producers have a lot on their mind as the plan for 2022.

"We would expect that many producers could be nervous as they look at high input costs and the uncertainty, but also optimistic that the market will give them an opportunity to lock in profits," he pointed out. "I think they are all acutely aware of how important an effective market plan will be in 2022. At CME, we want to continue to provide them with the tools they need to manage risk as effectively as possible, and to understand how options products could fit into their market plan, as well as where they can go for good sources of information.”

He adds there a many ways to learn more about what fits in your marketing plan.

“I always say that I think it’s really important for producers to have a good broker or marketing advisor, so if they don’t have one, find one. Second, we have a lot of great tools on our website about all our products. I’d especially point them to our educational materials around the Short Dated New Crop options.”

Visit CME Group's Website to learn more about Short Dated New Crop Options.

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