Options for Marketing Corn Now

January 6, 2017 12:00 PM

Farmers across the country are swimming in old-crop corn. Carryover is weighing on the market, and many top operators find themselves in need of a marketing strategy for stored grain—and soon. Although analysts debate whether the market has put in a floor and what factors it will take to move prices higher, farmers should take a forward-looking approach to marketing.

One time-tested strategy is to do nothing. For more than a century, farmers have sat on stored corn to wait for a better price, says DuWayne Bosse a South Dakota grain farmer and owner of commodity marketing firm Bolt Marketing.

“If you’ve got corn in the bin like me, you could consider sitting back and waiting,” Bosse says. “I think much of the negative news is priced [into the market]. I think the downside risk is somewhat minimal, and we’re going to grind higher in corn.”

It’s only OK to sit and wait for the price to move higher if you’re doing so as part of a marketing strategy, Bosse cautions, not simply out of fear. If the end of March comes and you still have a lot of unpriced corn, you should look out to June or July futures and aggressively get rid of it, he says.

If better commodity marketing is one of your New Year’s resolutions, you must determine how much money you will invest in marketing and your threshold for risk.

“When we understand your budget and your risk tolerance,” says Naomi Blohm, a market analyst with Stewart-Peterson LLC. “We have a better picture of what kind of strategies would be the most appropriate fit for your farm. We can then teach you realistically how those customized strategies will unfold under certain market scenarios.”

Multiple Strategies. Low- and higher-risk strategies are available to producers depending on their level of comfort.

Call options work well on a limited budget. This lower-risk strategy is also good if you do not have an interest in potential margin calls, Blohm says. “The advantage is that you pay a one-time premium up front, and if the market rallies, you are able to take advantage of the rally,” she says. “Right now, a call can cost anywhere from 10 cents to 30 cents.” If you’re bullish about the market and decide you want to use a call option, it’s important to purchase one before the price rally starts, Bosse says. “You can’t wait until the market is at $4.20 per bushel to buy a call option because it will be really expensive,” he says.

Bull-call spreads essentially involve buying one call and selling another. Blohm shares an example of this lower-risk strategy: Suppose you buy a $4 call option for December 2017 and, at the same time, sell an out-of-the-money, $4.50 call option for December 2017. You’re able to capture the range between the current market price up to $4.50 per bushel, and it’s considerably cheaper, she says. “The advantage is that it brings down the cost significantly because you buy a call with a strike price close to [what] the current futures price is trading, and then at the same time you sell out of the money for a higher call.”

Buy a call and sell a put if you think prices will rise. This approach, while higher in risk than call options or bull-call spreads, “makes the call strategy a little bit cheaper and gives you some additional muscle,” Blohm says. Here’s an example: Suppose December 2017 corn trades close to $3.90. You would buy a $3.90 call for December 2017 and, at the same time, sell a $3.40 put option under the market for December 2017. “As long as the futures market goes sideways or higher, you’re at limited risk for a margin call and you have the ability to capture upside potential,” she says. “The risk is that if the futures go lower, you risk a margin call due to the sold put.” Farmers should use this option when they think the market low is in, Blohm says.

Watch And Act. Regardless of strategy, it’s always important to know your cost of production and be prepared to take advantage of opportunities. “If you see any basis improvement jump on it,” Blohm says. She advises producers to be ready to buy back some ownership because corn tends to go higher between now and June. Bosse agrees producers should take advantage of profitable opportunities. “At any time, if someone offers me an attractive price, it’s gone,” says Bosse, referring to the corn in his bin. “I can always buy back some ownership if I’m still bullish on price.”

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