No. 12 (2003)

The Possibilities of Futures and Option Hedge in Price Risk Management for GrainProduction

Published November 26, 2003
László Kozár
Debreceni Egyetem Agrártudományi Centrum, Agrárgazdasági és Vidékfejlesztési Kar, Marketing és Üzleti Tanszék, Debrecen


Kozár, L. (2003). The Possibilities of Futures and Option Hedge in Price Risk Management for GrainProduction. Acta Agraria Debreceniensis, (12), 72-80.

The greataest risk tograin production is fluctuation in market prices, which is over 50% over the course of a year; and year by year, as well. There are real market circumstances in the grain market, instead of state guaranteed fix prices, which was the norm under the former political system.
According to the general opinion of producers, losses come from their defencelessness against buyers. The real situation is that price risk can be managed by suitable market strategy, and loss production can be avoided.
Hungary has a futures market (which is organized according to the CBOT system) in the grain sector, which is an unique institute in Europe. This organisation is suitable for hedge businesses and it has convenient technical and institutional background.
There are two possibilities to make hedge business. One of them is the short hedge with futures contract when the producer sells his product for long term if an acceptable profit is included in market price. In this case seller can protect himself against low market prices.
This technique can be considered as professional for price risk management, but possibly has financial cost because of the weak financial situation of Hungarian producers this solution seems expensive for them.
There is an other possibility in the Commodity Exchange for manage price risk, that is the option technique. This solution is suitable for insure prices as well, and has an other additional advantage, namely: there is no financial costs in this case.


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