Options give the agricultural industry a flexible pricing tool to assist in price risk management.
They offer a type of insurance against adverse price moves, require no margin deposits for buyers, and allow buyers to participate in favorable price moves. Commodity options are adaptable to a wide range of pricing situations. For example, agricultural producers can use commodity options to establish an approximate price floor, or ceiling, for their production or inputs. With today's large price fluctuations, the financial payoff in controlling price risk and protecting profits can be substantial. An option is simply the right, but not the obligation, to buy or sell a futures contract at some predetermined price within a specified time period.