Forward contracting is promising to sell one's crops at a future date at a specific price for the purpose of guaranteeing a specific level of profit. Hedging is another available marketing tool. Hedging tends to give the producer more flexibility when compared to forward contracting, but it does involve additional costs such as commission and interest on margin money. A hedger is a producer who uses the future market to help manage risk and protect profits. Since 1984, options have been available to agricultural producers as a pricing alternative.
Options facilitate the transfer of price risk to others.
Agricultural options provide a type of price insurance to producers. An option gives the buyer the right, but not the obligation, to buy or sell a commodity at a specified price during a specified period of time. Options must have a writer, that is, someone who assumes the risk in exchange for a premium paid. This premium is a market-determined price set on the exchange floor by options buyers and sellers. Options are exercised at the buyer's discretion.