There’s no shortage of farmers seeking to sell old-crop corn ahead of spring planting 2016, says Bryan Doherty of Stewart-Peterson. Their reasons are varied and include freeing up cash flow and avoiding grain spoilage.
“We’re getting a lot of questions from farmers who are asking, ‘If I sell this, it’s cheap, I don’t want to give it away, but I need some cash flow, I need my space, I need to move it. How can I stay in the marketplace?” Doherty tells “AgDay” host Clinton Griffiths on the Agribusiness Update segment.
Three strategies for selling old-crop corn might be a good fit depending on the producer, Doherty says.
1. Futures. This approach allows producers to buy a futures contract and replace their grain in the bin such that they win if the market goes up and they lose if the market goes down, Doherty says. “You’ve reduced your storage cost, so that’s a benefit, and you’ve reduced the risk when prices go higher of basis widening, but you’ve also taken away the benefit if basis improves,” he explains. “But it’s a way to re-own [grain].”
2. Options. For producers who don’t want the “unlimited risk” in margin calls created by futures, Doherty says, one solution is options. He recommends buying December options versus the more popular July options, which represent the last old-crop contract. That’s because the second half of the year is likely to set the stage for the most weather-related change. El Nino could flip to La Nina, for example, and if drier weather ensues, price fireworks might follow. “You’ve got ample time. You’re not going to see rapid time erosion on the December options. In addition, if you break down the cost per day, it’s cheaper to own a December option than it is a July option.”
3. Bull-Call Spreads. Doherty calls this one a “very conservative” strategy. “ That’s where you’re buying a call—so you might buy a December at-the-money call—and jumping out 80 cents and selling a call, you get that premium immediately back to you to help offset the cost of the lower strike price call,” he explains. “At the same time, it’s still a fixed risk position. It is a slower mover. You’ve got to understand how it works. But there’s math behind options. Use that to your advantage.”
Click the play button below to watch the complete interview with Doherty on “AgDay.”