Planting Issues: How to Get Out of Futures Contracts You May Not Fill

May 28, 2019 01:15 PM
 
 

More rains swept across the country to start the week, adding to the planting pressure many were already facing. Now, the reality is becoming grimmer for some producers: some of their acres probably won’t get planted this year.  At the same time, corn futures are rallying, with producers facing better prices than they thought a month ago.

As that reality sinks in, Angie Setzer, V.P. of grain for Citizens Grain LLC said she’s becoming inundated with calls. Many producers have one question: “What do I do now?”

“If you're one of the folks out there amongst pretty much everyone that has new crop corn sold at much lower levels than where the board is trading right now, levels that would have been a great sale if you were planting and seeing the emergence that we have lived for the last five years, you have some options.”

There are three main options for a producer in that predicament, Setzer said while stressing farmers should have these conversations sooner rather than later are crucial this year.  

Option 1:  Lifting Out

“The first option is lifting out, just canceling the contract,” she says. “To do that, you basically have to take your futures cost at current futures versus contracted futures, whatever that value is, and some companies will have a charge attached to that, and you’ll basically write a check and you'll no longer have that obligation. That should maybe be looked at as one of the first options.”

Option 2: Roll The Contract Forward

“The next option is to take a look at what it would be to roll it forward to next year, but keep in mind right now the December spread is trading at an inversion. Right now, I think it's traded about an 18 cent inversion, it's going to put you at about $3.90 futures for next year, but you are no longer short or obligated to deliver in the 2019 crop year, and you're looking at what will be taking place for next year.”

Option 3: Option Strategies

“For those of you that have crops planted, but just want to take advantage of maybe some upside, maybe you went from 20% sold to 60% sold based on what you're looking at with production potentials or something like that, to ahead and look at some options strategies for purchasing some call options, if you think this markets going to continue to run and you have the ability to spend some money to kind of try to grab some of that upside,” she said. “A lot of my customers aren't paying extra for the time value. We're strictly looking at the intrinsic value and trying to capture a burst in price here over the next three weeks.  Everyone's going to have a different opinion on which options structure to get into how to approach that. I'm not making any recommendations to anyone other than just kind of throwing out the options for options to my customers and letting them make a decision.”

Every producer is different, Setzer adds and the conversations are much easier for producers who have some of their crop planted, versus the ones who haven’t turned a wheel yet. However, if you’re a producer who fears you won’t plant, she advises to start having those conversations now.

“If there's a problem, face it sooner than later,” Setzer says. “It may not be the approach that you want to take, but obviously, no one knows what this thing is going to look like in three to six months. You just have to make the best decisions based on what you know right now, with what experience [you have] and what situation you're facing at this point.

“As a grain buyer, I wouldn't want my customers selling $4.30 December futures right now, if they don't think they're going to get planted, because then three weeks from now, four weeks from now, we're having this conversation that I'm talking about with the folks out there that have $4 futures in place that aren't sure they're going to get planted.”

Producers need to make sure they aren’t over exuberant in selling crops they aren’t sure will be planted this year.

“The reality is no one can tell you where this thing's going to head,” said Setzer. “You individually know what your risk is or what you're trying to protect. So, you just need to have all of the options laid out in front of you as to what you can do in these types of situations and then you have to be the one to choose what your decision is.”

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