Historic Drought Underscores Need for Volatility Buffer

The past year brought several events that roiled grain global markets, including one of the worst U.S. droughts on record and a stream of Agriculture Department crop estimates that caught buyers and sellers leaning the wrong way at various times.

All of this may have seemed unusual, but it really wasn't, according to Howard Simons, a former trader. "As we look ahead to 2013, it's as important as ever for anyone in the grain business to remember that risk will never go away, and therefore it must be properly hedged," Simons wrote in a new report.

Commercial grain hedgers who tried to time the market with futures over the past year were faced with the usual considerations of when and at what price to hedge. Buyers who did not have long positions in place before the drought intensified found themselves in the scary position of buying into a series of new highs in June and July.

"This is where CME Group grain options in general, and a suite of recently-launched option contracts in particular, offer customized, cost-effective solutions for a hedger's specific needs," Simons wrote.

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