Rhonda Brooks: Some Answers to Your Questions

April 13, 2018 02:15 PM
Rhonda Brooks

In the Early Spring issue, I mentioned the marketing education series Farm Journal Economist Chip Flory developed and said I would send free copies to the first five farmers who sent me a marketing question. Wow, did you ever respond. I ended up mailing 30 copies of the series. In addition, Chip gave detailed answers to many of your questions (see www.AgWeb.com/marketing-moves). Here is a couple I thought you might value. Thanks so much, everyone, for your emails and calls. I enjoy hearing from you.

Question: Curt from St. Paul, Neb., asks: I don’t really understand the put, call or hedging part of marketing. Can you help?

Chip Flory’s answer: Hedging sets a price, but not the basis. A hedge is a short position in futures against the grain in the field or already in the bin. The only risk in a hedge is basis, so you want to hedge when basis is below average and prices are at a level you want to capture (either because they are high or because you are concerned they will go even lower). When you hedge, your net selling price will be the hedge price plus basis. If futures are at $4 and basis is -50¢, the current value of the corn is $3.50. If basis firms to -30¢, the value of the hedge is $3.70. If basis goes to even when you make the cash sale, the net price is $4. That’s true if the futures market goes to $2 or to $6. The reason: you set the price with the hedge and any gain on the hedge (move to $2) will be offset by losses in the cash market; any losses on the hedge (move to $6) will be offset by gains in the cash market. That’s why the only risk on a hedge is basis movement. It’s just one position (futures) offsetting the other (cash, or physical bushels). For more information, read “This is How Options Work” at www.AgWeb.com/options-101.

Question: Jessica from New Concord, Ohio, asks: Should I be using my grain bins strictly as a basis improvement tool? If not, what is the best use of on-farm storage?

Chip Flory’s answer: No, basis improvement is only part of the advantage of a grain bin. The corn market has made a habit of trading at “full-carry,” or better. That means March, May or July futures trade at enough of a premium to December futures to “pay you” to store the corn until later when end users want or need the corn in the bin. Capturing that carry can make a grain bin as valuable as the basis improvement. And if basis on summer-month forward contracts is at least average, the carry in the futures market might make it possible for you to lock in a price that’s 25¢ to 30¢ higher than for harvest-season delivery. And that’s without basis improvement. But, the most-used strategy with a grain bin is speculation—leaving grain in the bin unpriced for a post-harvest, demand-led rally or for a crop scare out of South America.

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