As La Niña Ends, U.S. Farmers Look to More Variables in Weather
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Hedging Weather Risk

Heading into the Prospective Plantings report on March 31, many producers turned to Weekly options to manage risk. Earlier this year CME Group introduced New Crop Weekly options, which combine attributes of Short-Dated and Weekly options, offering new crop exposure at an even shorter duration and providing more flexibility for market users. New Crop Weekly options on December Corn and November Soybean futures expire Fridays from February through August. The contracts have been steadily growing since launch, with a record 2,700 contracts traded on March 31.

Nate “Ben” Breisch, broker at Allendale, says short-dated options also help his clients manage their new crop risk easier and with less expense.

Contracts for new crop soybeans and corn start in November and December, respectively, so buying a traditional option means higher costs because of the amount of time between spring and late fall.

grain oilseed option vol
Short-Dated and Weekly New Crop options have grown in popularity among grain market participants.

“I like using the short-dated options because I can protect my farmers on new crop corn with less risk than it is with just futures,” says Breisch, who uses futures and options in tandem.

For example, a traditional at-the-money December corn option that expires in late November could cost around 40 cents a bushel because of the amount of time between putting in the trade and when the contract expires. With each futures contract worth 5,000 bushels, that protection costs about $2,000. With a short-dated option, because they expire much sooner, that cost can be as low as a couple of hundred dollars, depending on when the position is placed and when the option expires, Breisch says.

Beck, the Nebraska farmer, says he’s started using short-dated options to help hedge some of his new crop risks. He says not having to pay for the higher time value compared to traditional options makes it more affordable. Whether it’s protecting a position ahead of a major U.S. Department of Agriculture crop report, or changes in weather forecasts, the short-dated options offer flexibility.

“You can be a little more responsive to changing conditions,” he says.

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