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New products control risk

Agriculture.com Staff 11/17/2011 @ 3:24pm

Grain marketing is no easy chore, especially when you try to sell a crop before it's even planted. Marketing strategies are virtually infinite, but the tools themselves are fairly straight-forward: futures, options, the cash market, and hedge-to-arrive.

But earlier this year, the CME Group, which owns the Chicago Board of Trade grain futures exchange, launched a number of new traded products that might augment your marketing toolbox.

Most of these products were launched in the spring or summer. The early adopters seemed to be the floor traders and the big commercial grain companies that were best positioned to take advantage of these new contracts.

At the farm level, producers and their advisers are just being introduced to these products and how they might be used. Similar to when standard options-on-futures were introduced a couple decades ago, farmers and brokers are free to develop creative marketing strategies with these new contracts.

The CME hopes farmers will participate in trading these products. The economists and statisticians who developed these contracts spent a lot of time trying to tailor the products to attract both buyers and sellers, in roughly equal amounts, says Fred Seamon, who participates in that effort in his role as associate director for commodity research and product development at the CME.

“There's a lot of interest in these options because you don't have to pay a lot of time premium.”

“When we research an industry for new trading products, we like to find what we call natural longs and natural shorts,” he says.

Several new products – such as weekly options and calendar spread options – are attracting good volume in just their first year of introduction.

Weekly grain options

Weekly options mean that grain futures now have an option contract expiring every week of the year. They are short-term options that are no more than four weeks long.

The exchange has long had standard options that track the staggered schedule of the futures months (such as July, September, and November). Later, the exchange added serial options that fill in the nearby months that were missing between standard options.

Weekly options are similar, filling in the nearby schedule so that the next four weeks always show a Friday-expiring option. When one expires, a new one is added, always offering four options over the next month.

There's a lot of interest in these options because you don't have to pay a lot of time premium. Farmers can use them, for instance, to provide low-cost price protection around the volatile planting and harvest seasons, possibly even the corn-pollination season. If there's a three-week heat dome building over the Midwest, there's a three-week option to match. Other parties are using them actively to provide short-term protection near a key USDA report.

Citing the trade's acceptance of weekly grain options (WGOs), the exchange later added weekly options for cattle, soy oil, and soy meal.

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