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Capitalize on Options Premiums at 15-Year Lows

07:47AM Oct 01, 2014

By Ed Clark

True or false: Corn and soybean prices have fallen so far and so fast they simply can’t go lower because prices are well below production costs. That statement is false, says Dave Fogel, director of farm marketing for Advance Trading. 

Options premiums are at their lowest price in 15 years. On the December contract as of Aug. 14, the year before the option expires, a 30¢ premium for 2015 meant going 15¢ out-of-the-money for a $4 put.

“We can go below breakeven and stay there a long time,” explains Fogel, who says he is not a gloom-and-doom analyst. “Farmers care about breakeven, but the market doesn’t.” 

As a result, farmers need to understand the risk they’re taking with unpriced grain. He estimates 85% of the 2014 crop is unpriced. Even more sobering, as much as 20% of the 2013 crop is unpriced.

Delayed marketing poses a concern because no one knows whether the market will move lower or higher in the months ahead. After all, some end users in 2012 said corn couldn’t go higher than $6, only to see prices hit $8. Farmers can prepare for those scenarios and others with options strategies that have become a good value, Fogel advises. 

Producers without on-farm storage should consider making corn sales at harvest if commercial storage is the only alternative. Then consider re-owning the grain by purchasing call options, Fogel says, to capitalize on market rallies. Meanwhile, farmers who store grain commercially should strongly consider put options as a method of protecting against downside risk, he says.

Put options also make sense for farmers with on-farm storage as a means of protecting the value of grain inventory, he adds. He suggests farmers buy puts to lock in the month with the best carry.

Compare put-option buying power on the December contract as of Aug. 14, the year before the option expires, Fogel says. A 30¢ premium for 2015 meant just 15¢ out-of-the-money for a $4 put with futures at $4.15. That compares to 34 cents out-of-the-money for 2014. For November soybean put options, to keep premiums around 50¢—also on Aug. 14 the year before the option expires—a producer would be 41¢ out-of-the-money for 2015 on a $10.20 put and $10.61 futures. That compares to 70¢ out-of-the-money for 2014.

Don’t Stick 2015 Corn in the Bin and Throw Away the Key

By Nate Birt

To avoid risks posed by low crop prices, corn producers should begin to develop marketing plans for 2015 and 2016, experts say. Doing so will protect downside and also allow you to capitalize on upside potential.

“As soon as you secure the land, you should start looking at risk management,” says Don Roose, U.S. Commodities. “You can still buy some puts at the money, give yourself around the $3.90 or $4 level for ’15 and ’16 and still give yourself a chance to get $4.90 to $5 on the upside. ... Have some insurance on in case we end up with $3 as the new norm.”

Plenty of farmers have told Mark Gold, Top Third Ag Marketing, they plan to take their corn, “stick it in the bin and throw away the key,” he says.

“I can’t imagine, frankly, a worse marketing plan,” Gold warns. “I think guys have got to be looking at the carry, and in order to look at the carry, you actually have to sell those deferred contracts. You can’t stick it in the bin and say, well, there’s going to be this carry there today and not take advantage of it today.” 

Although cost management will be a critical part of marketing for the foreseeable future, it’s important to remember pricing opportunities will continue to occur.

“You can still lock in $4 December ’15 corn on the boards still, lock in close to ’16 corn at $4, same thing for $10 soybeans,” Roose says. “So make sure you look at that when you’re planning ahead because we may be into a different era with lower prices.”