Farmers across the country are taking a look at their marketing plans for the year ahead.
Tim Andriesen, managing director of agricultural products at CME Groups, says many farmers are continuing to struggle with some of the challenges from last year. He talks about his biggest takeway from 2021.
?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 percent 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 who may be less familiar with options, Andriesen discusses a little more 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. 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.?
Learn more about options by visiting cmegroup.com.
