How Nontraders Can Use Futures and Options

Extension educators and their clients can benefit from understanding futures and options even if they are not directly involved in trading these contracts. "Use of Crop Futures and Options by the Nontrader," is a publication that focuses on how futures and options can be effectively used by the nontrader in making financial, production, and marketing decisions (Flaskerud, 1994).

For many years, Extension educators have emphasized how producers can manage price risk by hedging with futures or options. However, few producers directly buy or sell futures or options contracts, and those who do may be overlooking their other uses.

Extension educators may need to modify the emphasis and curriculum of current marketing workshops or offer an additional workshop to convey to clients the many uses of futures and options. Holding a workshop for nontraders would heighten awareness about how futures and options can be used to identify profitable opportunities. In promoting such a workshop, it would be important to emphasize that producers can benefit from knowledge of futures and options even if they do not trade them directly.

A better understanding of futures and options will also benefit Extension agents when they must resolve many of the market related problems brought to them. For example, deciding what to plant is mostly a matter of determining potential prices.

Using futures prices to derive a potential cash price is one of the benefits of futures and options to nontraders that is explained in the publication. How the potential cash price can be used with other information to evaluate (a) planting alternatives, (b) the profitability of storage, and (c) whether to sell, store or feed raised grain to livestock is examined.

Option premiums reflect what traders feel at a moment in time about possible future price movements. This information can be used as a guide for selecting marketing strategies and making pricing decisions. Because of the great amount of information that must be examined, a microcomputer program has been developed that derives price probability distributions from futures option premiums (King, Fackler & Held, 1991). Illustrations in the publication will help nontraders benefit from this program.

Most elevators offer several types of contracts, based on the futures and options markets, which can be used to manage price risk. Cash-forward contracts, basis contracts, hedged-to-arrive contracts, minimum-price contracts, and delayed- price contracts and their relationship to futures and options are explained in the publication.

A knowledge of futures concepts is essential to reaping the full benefits of contracts because alternative crop marketing strategies can be developed using certain contracts for different expectations about futures prices and basis (the relationship between futures prices and cash prices). These strategies may involve storage as well as one of a combination of two or more of the contracts listed. Numerous alternatives are illustrated in the final part of the publication.

Flaskerud, G. K. (1994). Use of futures and options by the nontrader (North Central Regional Publication No. 217, Fact Sheet No. 18). Fargo: North Dakota State University, Extension Service.

King, R. P., Fackler, P. L., & Held, P. A. (1991). Options [computer program]. St. Paul: University of Minnesota, Extension Service. (Acquisition No. AG-CS-3003-S)