Options based grain marketing strategies are often considered the best approach towards managing future price uncertainty. Exchange traded options charge a premium up front reflecting the expected price risk between time of purchase and expiration of the option.
The chart below analyzes the actual corn price change from November to expiration of the March corn call over the past 16 years. The call is assumed purchased early November and liquidated at expiration in mid February resulting in either a gain or loss. A DRC Market Index price is calculated based on a start and stop date matched to the option purchase
and sale date. The DRC Market Index average price is then compared to the net futures price received from utilizing the option strategy gain.
The Bottom-Line?
The DRC Market Index pricing tool over time produces the same results as an option strategy. Exchange traded options require an up front premium in exchange for a floor or ceiling price guarantee, while the market index contract requires no up front cost but offers no price guarantee. The end result however, is the same for both strategies.
DRC pricing tools have a unique advantage over options based strategies because they automatically execute. Every producer has experienced the frustration of owning an option but never knowing when to liquidate.
This analysis also highlights how accurately option premiums reflect future price uncertainty. As well they should since the option writer would not be willing to sell an option to a buyer anticipating losing money. Option premiums accurately price market risk up front. There is no strategy that can consistently outperform the market. Rolling options
or buying inexpensive options all result in the same end result: They will achieve the average price offered by the market over time. The Market Index DRC returns the average price every time too. No up front premiums to pay. No extra trading commissions. Why not simplify grain marketing and utilize DRC pricing strategy tools for most of your grain marketing needs?
About the Author: As a product development consultant for E-Markets, Frank Beurskens is responsible for creating cutting-edge e-commerce tools and applications for the grain industry. Frank welcomes your thoughts and feedback on this article. You can e-mail him at frankb@agribiz.com.
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