What Are My Options?

In uncertain times, having options can be very beneficial, but what are they actually? Well, options come in many forms. You can buy them to set a floor under the price of a stock you are buying or selling. You can also use them to put a floor under the price of farm commodities such as milk, soybeans, corn, or wheat. Essentially, they provide you with insurance against a fallout in the prices you receive.

At the risk of sounding repetitive, they are a tool that provides you with genuine “options.” You effectively have some real choices. You can choose, for example, to sell at the price set by the option if prices have fallen below that level. If the market price is higher than the floor set in your option, you simply take the higher market price and let the option expire unused.

This is probably an oversimplification of the process, but it will give you an idea of how they work in the agricultural markets. They work just like insurance on your house. You only exercise the option if you have a “fire,” so to speak.

One of the biggest complaints I often hear about options, especially in the dairy markets, is that the options are too expensive. Really? If you honestly believe that, talk to a producer without a “floor” under his milk prices who just received $15/cwt for his milk. It’s not a free ride, but it provides you with some comfort that you are not going to get slammed with huge losses because of the prices received. It certainly beats being at a price that is $4/cwt below your break-even level…

Another objection is that if you set these up and don’t exercise the options, you have “simply wasted your premiums.” Well, well. Isn’t that interesting? Since they are another form of insurance (against price fallouts), I have one question for you. If you buy house insurance (& I hope you do) and then your house doesn’t burn down, do you call your agent up and complain that you really didn’t need the insurance? Of course not.

Likewise, with options, the only reason they will go unused is if you get higher market prices. So, your profits should be fine. Why complain about the cost of that “insurance” you put in place on your selling prices. The key here is to consistently use options to protect yourself against price volatility. Then, you won’t be saying, “Oh, if only I had…”

What action have you been putting off in this area? If I can assist you with this, please let me know.

Let’s take your business to the Next Level!