Producers are able to shield their business from the worst consequences of falling commodity prices through the use of sound risk management strategies.

A producer with surplus inventory or floating price sales contracts is exposed to declining commodity prices. One possible solution is the implementation of a short hedge. A short hedge involves the sale of futures contracts in order to offset a long position in the underlying cash commodity. Profit from the short hedge will compensate the producer for losses incurred in the cash market from falling commodity prices.

Another straightforward hedge for producers is establishing a price floor through the purchase of put options. Put options offer the right but not the obligation to sell an underlying futures contract for a specific (strike) price over a particular period of time. The buyer of a put option is protected from falling prices while retaining the ability to benefit from rising prices. This flexibility represents a major advantage of options-based hedging strategies.

Options can also be used in different combinations as effective hedges. For instance, the simultaneous purchase of a put and sale of a call provides producers with a price range for their output while reducing hedging costs. These collars can potentially be established at zero cost to producers. Options are especially useful for producers that have entered into contracts to supply a variable quantity of a commodity.

The use of futures and options has also enabled producers to offer customers long term fixed price commitments when required. These commitments leave producers exposed to rising commodity prices which can be hedged through long hedges or price caps. In this way, futures and options serve as marketing tools for producers enabling them to offer customers a range of pricing options.