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Consider Options to Protect Prices of a Lifetime

June 13, 2011
By: Ed Clark, Top Producer Business and Issues Editor

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Most producers are not spending nearly enough to protect high  market prices that could evaporate tomorrow. That’s the view of Mark Gold, managing partner of Top Third Ag Marketing, Chicago. He spoke at Top Producer’s Summer Seminar this week in Bettendorf, Iowa.

Producers should stay alert to several technical points. If new crop July corn goes over $7.90/bu., the market has “tremendous upside potential,” the same for $14.70 soybeans and $9.25/bu. wheat. “If these points are reached, it doesn’t mean go long the farm,” however, he says. “The more volatility, the more opportunities there are,” Gold says. “We love volatility. Options allow you to take advantage of every move. Don’t buy futures,” he stresses. “If you trade outright futures, the pros in Chicago will get you. You’re shooting yourself in the foot.”
               
You have to be willing to spend $20 to $30/acre to protect price,” he says. Even so, that would be less than 10% of what growers spend to grow the crop, given what input prices are today of $450 to $500 to produce the crop. Gold thinks there may be some marketing opportunities prior to July 4, a key point to watch. “When the world wants it, sell it to them,” he adds.
 
The strategy he most favors to capture price strength is to use put options, even though puts may cost 50 cents per contract. “There is no such thing as a free options contract,” he adds. Gold says that some of his clients used this strategy in 2008 when prices were strong and protected themselves against the down move in 2009, thus individual producers protected themselves against the loss of hundreds of thousands of dollars of income. Gold continues that he hopes options expire without producers actually needing them, as that means prices continue to move higher. But, he asks, “are you ready today for might happen tomorrow?” And eventually, supply and demand rule, he argues.
 
He says that coverage of soybeans with options, for example, might cost as much as $50/acre. “Would you spend $1/bushel to protect $17 beans?” He thinks that’s cheap income insurance.
 
While demand is strong and a weaker than expected crop could push corn prices all the way to $10, Gold has several cautionary thoughts. First, with high prices, America, Europe, and South America will be gearing up to produce what the world possibly will want less of in the future. Second, if corn prices go much higher, it isn’t that the government would actually need to do anything on placing an embargo on grain sales, it would just have to say it was thinking about it and prices would tumble, Gold says.
 
Furthermore, Gold asks, “it is better to speculate (not doing any marketing)?” He doesn’t think so with today’s cash rents that only promise to go higher in 2012.
 
Because of price risk, Gold thinks that producers should consider pricing 2012 and even some 2013 crop in about the next 30 days.
 
For More Information
Hear more from Mark Gold with his daily market commentary: Top Third Ag Marketing Report
 
Learn more about the first-ever Top Producer Summer Seminar

 


 

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COMMENTS (6 Comments)

JeremeyFrost - Onida, SD
i%20think%20i%20might%20prefer%20to%20sell%20the%20option%20instead%20of%20buy%20the%20option%20as%2​0suggested;%20for%20one%20to%20be%20correct%20when%20buying%20an%20option%20you%20have%20to%20pick%2​0the%20direction%20and%20time%20when%20the%20move%20will%20happen%20by;%20whereas%20if%20one%20sells​%20the%20option%20especially%20if%20selling%20out%20of%20the%20money%20one%20doesn't%20have%20to%20b​e%20right%20for%20the%20option%20to%20pay%20off......you%20just%20have%20to%20not%20be%20wrong​
5:44 PM Jun 13th
 
JeremeyFrost - Onida, SD
i%20think%20i%20might%20prefer%20to%20sell%20the%20option%20instead%20of%20buy%20the%20option%20as%2​0suggested;%20for%20one%20to%20be%20correct%20when%20buying%20an%20option%20you%20have%20to%20pick%2​0the%20direction%20and%20time%20when%20the%20move%20will%20happen%20by;%20whereas%20if%20one%20sells​%20the%20option%20especially%20if%20selling%20out%20of%20the%20money%20one%20doesn't%20have%20to%20b​e%20right%20for%20the%20option%20to%20pay%20off......you%20just%20have%20to%20not%20be%20wrong​
5:44 PM Jun 13th
 
JeremeyFrost - Onida, SD
i think i might prefer to sell the option instead of buy the option as suggested; for one to be correct when buying an option you have to pick the direction and time when the move will happen by; whereas if one sells the option especially if selling out of the money one doesn't have to be right for the option to pay off......you just have to not be wrong
5:44 PM Jun 13th
 
JeremeyFrost - Onida, SD
i think i might prefer to sell the option instead of buy the option as suggested; for one to be correct when buying an option you have to pick the direction and time when the move will happen by; whereas if one sells the option especially if selling out of the money one doesn't have to be right for the option to pay off......you just have to not be wrong
5:44 PM Jun 13th
 
JeremeyFrost - Onida, SD
i think i might prefer to sell the option instead of buy the option as suggested; for one to be correct when buying an option you have to pick the direction and time when the move will happen by; whereas if one sells the option especially if selling out of the money one doesn't have to be right for the option to pay off......you just have to not be wrong
5:43 PM Jun 13th
 
JeremeyFrost - Onida, SD
i think i might prefer to sell the option instead of buy the option as suggested; for one to be correct when buying an option you have to pick the direction and time when the move will happen by; whereas if one sells the option especially if selling out of the money one doesn't have to be right for the option to pay off......you just have to not be wrong
5:43 PM Jun 13th
 



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