This graph shows daily settlement prices for Dec’03 futures from about fourteen months out through expiration. The blue and pink lines show the premium value associated with 58-cent put and call options, respectively. This was a year when the normal spring seasonal pattern was evident, and the outlook suggested a 50-60 cent trading range. Then an unexpected September surge in demand by China caused an 80 cent run. This sort of event is totally unpredictable, and can only be planned for by purchasing inexpensive insurance against losing an opportunity like this. Your marketing plan must be flexible enough to protect you from losing such an opportunity. One very basic way to implement such an insurance policy would be to purchase call options in the fall which would increase in value (e.g., the pink line) if futures were to rise. Purchasing a 58 cent call option in late August would only have cost two cents/lb in premium.
Welcome to the educational website of Dr. John Robinson in the Department of Agricultural Economics at Texas A&M University.
The website focuses on farm-level implementation of strategies for Texas cotton growers to deal with yield and price risk. Contact me to receive a weekly e-mail notice of when the latest edition is posted on-line. In addition, we provide daily crop market news and commentary on Twitter (@aggie_prof) and also on the Master Marketer facebook page. We welcome your feedback and interaction in these social media.