As producers make plans for February, they must consider which marketing tactics will serve them best in light of lower crop insurance guarantees. Here, analysts share several ways farm businesses can act.
Different Decisions Available Depending On Risk Aversion
Naomi Blohm, Stewart-Peterson
The federal crop insurance price is set during February based on the average daily closing price of December 2015 CBOT corn futures. If corn prices trend higher in February, then great—producers enjoy a higher overall average. On the flip side, a concern of many growers is, “What should I do if the price of corn futures is high at the start of February and then goes lower during the month of February? How can I protect that initial higher value?”
Consider two scenarios, one for producers who use no margin calls and another for producers comfortable with margin-call risk.
Conservative: Buy the May short-dated at-the-money corn put. It is based off December 2015 futures. Expiration is April 24, but of course, you can exit anytime before then. You are protecting new-crop price, but it does not cost as much as a regular December 2015 corn put, as you are not paying for as much time value. As of this writing, cost is near 20¢ and has a 50% delta, or rate of return.
Aggressive: Buy a regular December at-the-money corn put. At the same time, sell a call above the market, three to five strike prices higher then where the current market is trading. By buying the put and selling the call at the same time, your initial out-of-pocket contribution will be less and your delta will increase, providing you with a greater return than just buying a put alone.
Put Options Allow Producers To Protect The Downside
Mark Gold, Top Third Ag Marketing
The new farm bill has given ag producers a chance to protect their crops and, to some extent, revenue. What’s most important is that you make an informed decision by the end of March, or the government will make the decision for you. Remember: Neither crop insurance program will market your bushels.
As producers have realized from past programs, the results on the revenue side for bushels you grew might not be what you expected. It is critical to combine the insurance with a legitimate marketing program in order to maximize your opportunities. With December 2015 corn at $4.25 per bushel, and November 2015 soybeans trading over $10, there is plenty of downside price risk not covered by the insurance. Top Third would recommend protecting that by purchasing put options. This will avoid margin calls, keep the upside price opportunity open, and help protect you in case prices fall.
Sell Price Rallies As They Happen
Mike North, Commodity Risk Management Group
This spring will no doubt be filled with the very same volatility that has defined the market in recent months. What this means for producers and sellers of grain is that even if prices are generally moving lower, there will be some motion toward higher prices along the way. It is advisable to sell these rallies as they come. In the meantime, it is prudent to defend current market opportunities with put options so as to be sure that further downside risk is handled while waiting and hoping for better sales opportunities. At a time when supply has caught up in its foot race with demand, we do not want to maintain exposure to lower price levels. Buy puts and sell rallies as they arise.
Disclaimer: There is substantial risk of loss in trading of futures or options, and each investor and trader must consider whether this is a suitable investment. There is no guarantee that the advice we give will result in profitable trades.