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Use Options to Manage Risk in 2014

November 26, 2013
By: Ed Clark, Top Producer Business and Issues Editor
Spreadsheet
  

Market experts agree profits will be harder to lock in this year. Here are some tools you should put in your marketing toolbox.

Options are a powerful tool providing insurance on both sides of the market, but not necessarily the way some have used them. With many projections pointing to lower grain prices in 2014, market experts says it is time to consider using options as part of your marketing plan.

These comments are experts from a recent Top Producer article that features analysis and commentary from 15 ag market analysts. Read the full article: They Say It’s a Bear Market
 


Brian Basting, Advance Trading

As we adjust to increasing stocks and weaker prices, markets are in transition. One alternative to consider is an option-based risk-management strategy. There’s a lot of downside potential in the market; however, supply and demand surprises could change that quickly.
 
Farmers can use an option-based program to establish a price floor for inventory in storage or expected production but leave the upside open. Another strategy is to make cash sales if basis is favorable and purchase call options.

Bill Biedermann, Allendale

Corn markets continue to respond to large ending stocks. U.S. soybean stocks are not as burdensome, but world supplies are at record levels.

Barring a major weather event, prices should bottom out at sub-$4 per bushel corn and sub-$11 soybeans. There are many tools, such as an option box, option three-way or covered hedge/sale, that are relatively safe. They allow you to establish a floor while keeping the upside open.

Alan Brugler, Brugler Marketing

The U.S. soybean stocks-to-use ratio is tight, but might loosen with better-than-expected yields. With the forecast of a record global stocks-to-use ratio, we could see soybean prices drop to the sub-$12 per bushel range.

When price targets are hit, farmers should scale up sales. Options spreads and cash market equivalents are probably the sanest way to ride out market volatility. There will be decent returns to on-farm corn storage, but you have to set a price to earn the carry. Simultaneous gains in both basis and price are rare, making cash-grain-only marketing difficult to do well.

Mark Gold, Top Third Ag Marketing

Since 1983 corn has not made lows in October, and it is more likely to make the lows in November or December. The government shutdown delayed USDA’s crop production estimates and opened the door for a bearish report. One saving grace might be strong demand from China.
 
I suggest selling the bushels above your average production history and maintaining corn put options for any unsold grain. If you are trying to capture the carry, you must sell the deferred contract to lock it in. With no carry in the market, farmers should sell soybeans at harvest and re-own the crop with call options when technical indicators turn friendly.

Brian Grete, Pro Farmer

The buildup of corn stocks means the market must work to rebuild demand. Lower prices will improve demand, but it’s going to take time. Soybean stocks are set to rise marginally through 2013/14. Unlike corn, soybeans don’t have to worry about demand. China’s robust appetite for U.S. beans limits downside risk barring a global macro-economic meltdown.

Because of the lower corn price outlook, even short-term rallies should be viewed as selling opportunities. The price structure for soybeans suggests selling now. Focus on managing risk with long futures and call options.

 

These comments are experts from a recent Top Producer article that features analysis and commentary from 15 ag market analysts. Read the full article: They Say It’s a Bear Market

For More Information
The editors at AgWeb.com are taking a look at experts’ projections for a variety of commodities in 2014 to help you succeed and be profitable in the coming year. Read 2014 Marketing Outlooks
 

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This material has been prepared by company employees and is in the nature of a solicitation. The information is not a research report. By accepting it, you agree that you are an experienced user of futures, capable of making independent trading decisions and that you will not rely solely on this communication in making trading decisions. Distribution in some jurisdictions might be prohibited. Persons in possession of this communication indirectly should inform themselves about and observe any such prohibitions and restrictions. To the extent that you have received this communication indirectly and solicitations are prohibited in your jurisdiction without registration, this communication should not be considered a solicitation. The risk of loss in trading futures and/or options is substantial, and each investor and/or trader must consider whether this is a suitable investment. Past performance is not indicative of future results. Trading advice is based on sources believed to be reliable. The information is not guaranteed to be accurate or complete, and it should not be relied upon as such. Trading advice reflects good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice will result in profitable trades.

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RELATED TOPICS: Corn, Soybeans, Marketing

 
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