You missed the $4.00 corn, you missed the $12 beans and the $6 wheat...what do you do now?
I have been getting this question a lot as of late. If this sounds like your predicament, I urge you to become proactive and get some type of plan or strategy in place sooner than later. Rather than spending time analyzing market sentiment or rationalizing the countless theories about why and where the market is headed, lets just say we could go even lower.
Simply take corn as an example. I think last year may have actually been our first real indication of how powerful the genetics have become. We didn't have the best of growing season and produced a record size crop.
As of right now, many of the guys out in the field are telling me they are way ahead of last year and are chomping at the bit to start planting. If this holds true, and we simply assume we have a better growing season than last year, you have to believe we will see yields in excess of 170 and number in the 14 billion area start to circulate. If this happens corn could easily dip below the $3 level and might stay there for sometime.
Another concern I have is that farmers love to plant corn. They often try and offset the lower prices by planting more corn because it gives them higher yields (they believe higher yields will help offset the lower prices). if this holds true we will actually see planted acres creep even higher and more corn actually produced.
Sure I think we could see a weather type rally in the coming months, but so does everyone else. In fact I believe the inflated weather premium is the only reason prices are this high, without that fear we would be considerably lower.
I think there are few ways you can play this market, and I have outlined them below. If you need more specifics just let me know and I will give you all the help I can.
They have taken some of the volatility out of the call premiums as of late, but you could have been selling Dec $4.50 calls all day long last week collecting $0.20 in premium ($1,000 per contract). I love selling calls in these types of markets simply because you can often generate fantastic revenue to help offset the lower prices. Obviously I would only advising selling the number of calls you are equally comfortable with pricing on the cash side.
example: If you where comfortable selling 50,000 bushels of corn at $4.50, then you could simply go out and sell the Dec $4.50 calls. You would have needed to sell 10 contracts (5,000 bushels each), and you would have collected around $10,000 in premium ($1,000 x 10). For those of you who have never sold calls, yes that money goes directly into your account. If upon expiration the December contract is $4.50 or below then you will have a net gain of $10,000 on that trade. If the market rallies up and settles above $4.50 on expiration you would owe $500 ($50 x10) for every penny above $4.50. But since you collected $10,000 ($0.20 premium each) you are at break even clear up to $4.70. That means the market would have to settle above $4.70 for you to loose a dime of your own money. If that happens all of our worries are over as we have been able to market and sell or actual cash corn at some really good prices along the way. As a producer I just think it is a no brainer with these type of market conditions. No to mention the extreme carry that is currently built into these markets, we will see these contracts depreciate in value more and more each month as they approach expiration. Your main risk is a settlement above the strike price plus any premium you have collected. Also remember that by selling the options you are by no means obligated to hold them until expiration, if you think the market conditions are changing or the positions start to move against you, you can exit the trades.
Sell Deferred Futures
I also like selling deferred futures contracts. I know some of you only like playing the options game, but you may want to consider a small play on the futures side. We have a very healthy carry built into each of these markets. I believe right now in corn we have a bout $0.04 a month. Simply stated this means that if you where to fast forward and project the December contract price out into the month of July we would see the price deflated by $0.15 to $0.20 from where we are currently at. That means basically if everything stays the same the December contract will natural fall in value by $0.15 to $0.20. In theory if we rallied $0.20 in the cash price between now and then the December contract would be at the exact same price you sold it and actually would not have realized of those gains. That makes for a fairly nice return, not to mention you are completely protected and making penny for penny if the market breaks lower. The downside is once again any large significant rally, but that will hopefully bail you out on the cash side.
If Your A Consumer (Ethanol Plant, Feed Lot, etc...)
I think the logical play here is to sell puts. You are going to collect nice premium. If the market rallies up you will get to keep the entire premium. If the market breaks lower you will have the opportunity to buy corn at some great prices. I am certain I'm not telling any consumer anything they haven't all ready heard or put into effect, but rather simply stating the obvious.
Current Marketing Positions
For us we are going to continue to sell calls and collect premium. We have 30% of our new crop hedged as we are short calls and long puts (2:1 ratio) in corn, beans and wheat. We will be very patient with our final 30% of our wheat still to price waiting for very significant moves, we will be a little quicker to price the corn and beans. My hope is to get another 30% priced before August 31st. If I cant, because the market simply won't rally to acceptable levels, I will attempt to generate revenue and income by selling Calls. If the markets doesn't rally up and give me the opportunity to price another 30% at least I will have made good money by selling premium during the whole process.
Wheat 70% priced @ average cash price of $5.43
Soybeans 40% priced @ average cash price of $10.25
Corn 40% priced at an average cash price of $4.05
Kevin Van Trump
Founder Farm Direction
Call or e-mail if you need some help or would like to talk more.