Using subsidized put options to replace the federal price and income support programs for corn

Congress has directed the Department of Agriculture to perform research and establish a pilot program to determine the feasibility of using regulated agricultural commodity options trading for the benefit of farmers to protect them from fluctuations in the value of their commodities.

The purpose of this study is to examine the prospects for using put options in place of current farm income support programs. It focuses on the feed corn program in its analysis.

It also examines available literature on the subject of using futures and options contracts to replace current farm programs.

The study uses the Black model for the pricing of options on futures contracts to estimate prices of options that would provide a level of income protection similar to that afforded by the current income support program for corn farmers. It goes on to estimate the fair value of the implicit put options granted by the Federal government for the 1982 - 1989 crops of corn and compares those values to actual program costs.

The results suggest the possibility that program costs are higher than they need be because government price and income guarantees are provided at a cost in excess of the fair market values of the current program's implicit options and that transfer of some or all of the risk-bearing role to the private sector would result in reduced government costs.