Chip Flory: Marketing Moves For 2018. Installment No. 2

March 20, 2018 11:39 AM
 
Farmers look for answers to questions about marketing their grain in 2018.

The following commentary does not necessarily reflect the views of AgWeb or Farm Journal Media.

Recently, I wrote that the first five farmers who sent me a marketing question would get an answer from Farm Journal. The response from readers was quick and slightly overwhelming. Within an hour of making that opportunity available, I had nearly two dozen responses and some excellent questions. In the following days, I will be posting some of the farmers' questions along with some answers from our very own Farm Journal Economist, Chip Flory. This is my second installment in the series. I hope the information provided is of service to you. -Rhonda Brooks

Tyler from Oskaloosa, Iowa, asks: What is typically the best marketing time frame for putting hedges on the markets?

Chip Flory responds: There are a couple of times to watch. We just completed one of those time periods--post-harvest rallies led by increased demand or on production issues in South America. Corn got the demand-led rally; soybeans got the production-issue in the South America rally. The second time to watch is spring/early summer in the U.S. Any weather scare will provide support, and trading funds are more likely to establish long positions on a “seasonal play” at this time. The key here--don’t worry about selling “the” high. When you get a price that works for you, take advantage of it with either hedges or cash sales.

Charlie from Reese, Mich., asks: I have 15% 2018 corn sold, 20% 2018 soybeans sold and 10% winter wheat sold. Should I buy short-dated puts or late puts or sell a few more bushels and buy calls? The sold bushels are part of the insured bushels.

Chip Flory responds: Depends on basis. If basis is above average, consider making additional cash sales to get to about one-third sold going into the planting season. But don’t just buy the calls. Markets are at pivotal levels right now. If prices drift lower, you can get the calls cheaper or step-down the strike price to get more effective coverage on the opportunity risk. If current prices generate “an acceptable return,” you can get even more aggressive than that, but leave maybe half the crop unpriced (or with a price floor in place) for the growing season.

Regarding your question about the short-dated vs full-season puts. Right now, use short-dated puts to build a price floor. Because of lower volatility, the strategy looks better for corn than for soybeans or wheat, but volatility is low enough for each of the markets. Even with the wheat crop concerns, 10% sold for the 2018 crop “feels” light, and a July put may be the best way to lock in a price floor while leaving upside potential alive while the market figures out the HRW crop situation. With the short-dated puts, consider using a corn or soybean put that expires in late August to get you through the key development stages.

If basis is below average, an HTA may be the best choice to lock in price--just give basis an opportunity to return to normal levels before locking in a net-selling price.

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