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AgriLife: Dealing With Uncertainty

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Mario Villarino DVM, Ph.D.
Hopkins County Extension Agent for Ag and NR
1200B Houston Street
Sulphur Springs, Texas 75482
903-885-3443

As we celebrate our memorial day, I have taken the time to reflect over the multiple sacrifices done by humanity to overcome adversity. Overcome challenges require audacity, tenacity and courage. Our armed forces are a prime example of such commitment.  It is important to recognize their commitment and most important, I believe is to learn from it and try to adopt such principles as we face challenges.  An important part of such process is to realize that the process of adapting and overcoming challenges could become scary and painful. So it is human growth.

Just like a child faces different challenges thru his or her development, businesses and farms do thru out their productive life. Recently I had an opportunity to visit with dairy producers related to economic challenges in and learned about methods to adapt to their uncertainty.  As producers become more familiar with options-based marketing, they can use more sophisticated trading techniques to offset some of the drawbacks inherent with options. Hybrid trading strategies that buy or sell additional puts or calls in addition to the basic price pro­tection provided by the purchase of a single option can lower the net amount paid for option premiums while still limiting exposure to margin calls. Such strategies are often referred to as windows or spreads. They are more complex than straightforward hedging strategies and often establish price ceilings as well as price floors. Other combinations of option strategies become profitable if prices move significantly either up or down, but not if prices remain stable (called straddles).

Options create a form of price insurance. The higher the price insured, the greater the premium. If prices increase, the price insurance is not needed and the producer lets the option expire and sells at the higher price. If prices decline, the producer exercises his right to sell at the guaranteed price established by the option contract. Of course, the producer may also sell any option he has purchased prior to the expiration date. The profit or loss from this trade is the difference between the premium paid for the option and the premium received when it is sold, less-commissions, interest, and any other fees. Crop insurance products can also provide substantial security to farm income and are a vital part of overall risk management. Agricultural producers today face volatile markets, tight credit, economic uncertainty and escalating input costs. Understanding and using risk management tools in this environment can reduce much of the price risk and may improve financial returns. Another important aspect of agriculture is to maintain a heathy diverse agricultural community.

The good old advice of “not putting all the eggs in the same basket” is really becoming more important recently. For more information on this or any other agricultural topic please contact the Hopkins County Extension Office at 903-885-3443 or email me at [email protected].

Author: Staff Reporter

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