US - Crop price expectations have generally trended downward throughout the growing season as conditions have been very favorable for large production of corn and soybeans, writes Bruce Sherrick.
Futures price expectations and eventual realizations have important risk management implications, and directly affect crop insurance indemnification as well.
The establishment of the Projected Prices (PP) used in establishing initial crop insurance guarantees happens in February prior to planting, and reflects the market's best "guesses" about levels of prices and about potential deviations in prices from those levels.
Growing season conditions, and the accumulation of other information affecting supply and demand then affect market participant's beliefs about future possible prices.
It is generally regarded that futures markets provide the best aggregated beliefs about future prices by market participants, given all currently available information; and that changes in information or resolution of uncertainty are reflected in changing prices of both futures and of options on those contracts.
As harvest approaches, the information generally becomes better understood and the possible range of prices shrinks toward the final futures prices as well.
In turn, the prices of options on futures reflect the degree of uncertainty about the futures prices and provide a means to recover additional probabilistic information about price uncertainty, or the probability of prices moving to various other levels, either higher or lower than the current futures price prior to expiration.
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TheCropSite News Desk