Futures Options to Manage Risk Associated with Cotton Program Participation

Foy D. Mills, Jr.


 
ABSTRACT

Participation in the cotton program requires a producer to idle a certain percentage of the base cotton acreage before becoming eligible for program benefits. Besides the actual costs of maintaining these idle acres, the producer must recognize the erodibility aspect of the deficiency payment and the opportunity cost of idling the crop base. The use of futures options to hedge against the loss of the deficiency payment and against market price increases on idled crop base acres is examined and an illustration from the 1987 crop year is presented. The simplest strategy available to a producer to protect the deficiency payment and/or idled acres is the purchase of call options.



Reprinted from 1988 Proceedings: Beltwide Cotton Production Research Conferences pp. 431 - 434
©National Cotton Council, Memphis TN

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Document last modified Sunday, Dec 6 1998