Don't get completely caught up in the "now"

June 17, 2008 07:00 PM
Most of the market focus is on 2008-crop, especially as heavy flooding across areas of the Corn Belt is causing supply concerns with this year's corn crop. While it's easy to get caught up in the "now," there may be opportunities to look further down the road to lock in historically high prices and cover some of your input costs for next year.

Today's featured question:

Here is something I'm thinking about. Take a Dec. '09 corn futures position. Buy Sept. '08 calls at 9.50 or 10.00 strike to help cover margin calls. If we do go to 8.00 or 9.00 on the board, old-crop should be more volatile than '09 and I'd spend less on time value. I'd possibly buy 3 calls for every two futures contracts at .20 per call. I am currently buying inputs for 2009 crop year to control costs and would like to cover some of those expenses.


My response:

I like the fact you are actively looking for a way to cover some of your 2009-crop input costs and lock in prices amid historically high prices. However, there are several "red flags." The biggest risk is margins calls, which you addressed. While the Dec. '09 futures should be less volatile than 2008 futures, there is still extreme volatility in all corn contracts. Buying deep-out-of-the-money calls to offset potential margin calls is somewhat risky given that the market would have to move a lot before the calls appreciate significantly because they would be so far out of the money when you buy them. In theory, you could face heavy margins calls and see your call options appreciate very little at first. If you are able to continue making margin calls, it could work in the long run, but you may face some anxious moments to begin with.

As for input costs, I think you are ahead of the game. Unless the market structure changes dramatically, I see no way input costs don't rise -- potentially sharply -- for next year.

Drop me an email at and your marketing questions will be answered.

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