In Iowa, there is a strong tendency for prices to rise when yields are low. It is somewhat less in early July, when crop prospects are less uncertain. If a short crop is developing, the market usually begins to sense that by early July. An alternative tool is to use options market to establish minimum new-crop prices, while retaining upward price flexibility. This provides a known maximum market cost exposure at the start of the transaction, without additional exposure from low yields and high prices.
Options have an up-front cost for the privilege of following prices higher.
The net cost varies with underlying volatility of the market and on when the options are closed out. Since the start of options trading in late 1984, on average, there has been incentive to close harvest-delivery options in early fall after production levels are almost certain, but before all of the time value is lost as contract expiration approaches. Use of corn puts or soybean synthetic puts in the spring has been helpful for profit management, although income is not guaranteed because of yield risk. With low yields, income from options positions can also be very low without crop insurance. Synthetic puts involve sales on forward contacts or hedges, while retaining ownership through call purchases.