Managing Price Risk with Grain and Oilseed Futures & Options

Like most farmers, grain and oilseed producers tend to focus on production risk rather than market risk. Market risk includes two components: price and basis. Price levels are discovered via the CME Group futures market. Basis is the relationship between a local cash market price and the CME Group futures price (Cash Price - Futures Price = Basis at a specific point in time). A downturn in price and/or weakening basis can be just as financially devastating as a poor crop and, in some cases, even more so. Unlike managing production risk, there are many alternatives available to manage market risk. This paper focuses on two common producer strategies using CME Group futures and options: short futures hedge and long put option hedge.

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