Commodity Options as Price Insurance for Pork Producers

Publish Date: June 3, 2006

Most pork producers are familiar with insurance. Producers insure buildings against fire, equipment against accidents, and their lives against death or injury. Insurance buyers trade a small but certain loss by paying an insurance premium to guard against the possibility of a large but uncertain loss. In pork production, one of the greatest risks faced is that of unfavorable price change. Market hog prices have been so uncertain that many times prices expected to be profitable when decisions were made regarding facility investment, breeding or feeder pig purchases ended up unprofitable instead. Additional risk also may be incurred on the feeding side as feed price increases and may wipe away anticipated profits. Because of these risks, producers might want to insure against unfavorable hog or feed price moves while retaining their ability to profit from favorable price changes. Producers have this opportunity by using the commodity options market.

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