Whether you are sold out of 2010 at lower levels, have inventory in the bin or are looking ahead to 2011, Bill Biedermann of Allendale has suggestions for you.
For growers who sold a lot at $4.40 to $5.40, he recommends a strategy that will keep you in the game until the acreage battle is resolved: “Buy a March $6 call, sell a $7.20 call and sell a $5.50 put for a cost of about 3¢. It has potential for up to a $1.20 profit on a rally from $6 to $7.20 at expiration less 3¢ cost. Ownership risk is 100% below $5.50 (a 40¢ sell off would lead to owning futures at $5.50). In that case, is margin required if prices are declining.” Allendale sees a potential corn market objective of $6.25-$6.50.
Biedermann is cautious, however: “I am concerned about the strength of the market because everyone is so bullish. Funds will probably sell somewhere between $6 and $7; in fact some specs already are scaling back. There is no need to chase it further. There are cheaper things they can go after for an inflation trade. But if you want to repurchase or defend some sales, this option is a good way to do it. Till spring, the 530 area is major support. If I wanted to buy, I would buy 50% and then if it breaks buy the other 50%.”
Those with grain in the bin might scale-up sell cash from $5.90 to $6.45, keeping the basis open (hedged to arrive) or use futures, he says. “Margin interest cost is easy to figure – let’s say you sell and the market rallies $1/bu. It feels bad, but interest cost on a $1 move against you at 7% is $350/year?and you will only have a hedge on for 4 to 6 months and there will not be $1 against you for the entire time. So at most, your interest cost might be $175 or about 3¢.
Basis is already improving and with as tight as stocks are, it should improve 30¢ from today’s levels, Biedermann says.
Looking at 2011, Biedermann says a multi-pronged approach is appropriate at these profitable levels:
Lock in some price using a box or 3-way options
1. Buy a $5.50put (floor) for 68¢ cents and sell a $7call (ceiling) for 30¢ for a net cost 38¢. This gives you unlimited downside protection from the current market (less the net cost) and leaves you with a $1.50 potential upside gain.
2. Same as above and buy a 440 put for 20¢, lowering your net cost to 18¢. This is cheaper than the box, leaves upside built in, and gives you decent protection for now but downside protection is limited.
3. Lock in some prices using cash or futures but make sure you leave basis open because tight stocks mean it will improve. So you can use hedged to arrive or hedge in futures starting at current levels and adding to sales up to $6.40. That’s $1.20 upward range so Biedermann suggests selling 10% for each 12¢ move. You face two dangers, he says: These are small increments so you still have a lot of the crop at risk. And there is a drought developing in the U.S.; if it doesn’t improve, you’ll need to buy calls against sales.