When prices get hot, keep a cool head and stick to a plan
Farmers checked the markets on their phones throughout the day Thursday at Corn College, as corn approached $8 and soybeans hit historical high prices of $16.85 yesterday. Even the markets can’t deny the drought has done significant damage to corn and soybeans, and this week’s crop progress report rated the corn crop at 38% poor to very poor.
"Crop insurance will have significant claims," notes Mark Gold of Top Third Ag Marketing, who spoke during this year’s Corn College luncheon. "Those of you who have revenue insurance will have some huge payouts this year."
For those without crop insurance, Gold says he would be hesitant to forward price much grain.
"If you want to sell it, maybe the elevator will roll to next year if you don’t have it, but I wouldn’t count on the elevators rolling forward," he says. Gold recalls 1998, when elevators allowed farmers to roll wheat from one year to next, and then they had double margin calls. "We came close to losing elevators because of that margin call issue," he says.
For farmers with insurance who know they will have a loss, Gold says to remember that the crop insurance company is going to average prices with the October price. He suggests thinking about a put option as an insurance policy. For example, to protect new crop corn you can buy a $7 December put option for 35¢. If the prices move to $8, $9 or $10, you will lose your 35¢ premium but you still have corn to sell at higher prices, Gold says.
"If prices go back to $5 where they were four weeks ago, you are protected at $7.50," Gold says. "I know there are still some lenders out there who still believe buying options don't work. But not one of our 3,000 clients at Top Third who follows our marketing recommendations has had one margin call on short positions, and every client in the program is participating in the rally."
"Don’t assume these markets can’t go right back down," he notes. "All it would take is putting the President in front of a press conference and have him mention putting an end to the ethanol mandate or reducing exports."
Farmers who own put options are protecting the bushels that are really out there. "It’s the only legitimate way to manage risk whether you are in a drought or if you have abundance," Gold says.
To survive in this "superheated" trading environment, you must follow some basic rules:
- Don't speculate.
- Don't think the markets can't go down.
- Don't put on marginable positions (i.e. trading futures or selling calls to pay for puts).
- Don't try to pick a top.