Preparing for price moves
Jul 24, 2012
Guest blogger Bryan Doherty, senior market advisor with Stewart-Peterson Inc., has some ideas to help you prepare for the possibility of a long downward price slope.
How high can prices go? That’s been a popular question from producers amid our summer of volatility. And yet, a better question might be: Why is it important to know how high prices can go?
Since nobody can predict price accurately, why not plan for the possibilities and make decisions now for what prices will eventually do? Prices will move. When prices do reach the top-side objectives you’re looking for, you need to have strategies in place to take advantage of them. You may not have any idea of your production capability this year or, for that matter, next year. However, when value presents itself, one still has to push ahead with marketing strategies.
Let’s start with 2012 crop. The market is currently pushing into (or near) contract highs on a daily basis. On a better sign of a top, or when corn likely breaches 8.00 in December and beans push through 17.00, one has to realize that demand probably cannot keep up. In turn, this means prices could likely have a very long downward slope.
For this scenario, consider put options. Buying puts establishes a price floor, yet leaves the top side open. Sometimes markets make what is termed an accelerated top. The market could be peaking near 8.00 (or just above 8.00) on December corn. However, those who believe in the accelerated top theory would argue that prices need to push substantially higher on a spike through this level. Another strategy is to continue to make small incremental sales as the market moves upward. As you do this, you’re probably regretting each sale you made prior, yet in the long run, it’s important to recognize the average you are building without over-committing.
For 2012, it’s important for you to look at opportunity. First and foremost will likely be either the hedge-to-arrive strategy or selling futures. Hedge-to-arrive contracts are executed by your elevator that sells futures for you and meets margin requirements. You have to be careful about how much of this you do. The elevator could run into financial trouble or they may over-extend themselves on the number of contracts they’re writing, since they may write contracts for a cumulative whole of their customer base. If basis is wide, hedge-to-arrives are often a nice alternative for farmers to get started. Forward contracting is certainly a possibility. However, basis is usually wide in spring and summer, therefore making the hedge-to-arrive alternative more attractive.
As for put options into the 2013 corn and beans crops, you have to realize you are paying for a very long-term contract – which is not to say you shouldn’t. However, your money may be spent elsewhere in a better fashion. The real advantage to purchasing a put, even though it will cost quite a bit of time value premium, is that it leaves the top side open. Should prices advance further for new crop prices, you may be in a position then to more aggressively forward sell through contracting, hedge-to-arrives, or selling futures.
There are a number of different tools and strategies that can be utilized in accordance with your specific situation. Applying those tools, and preparing for the possibilities, trumps trying to outguess the market.
Bryan Doherty is a senior market advisor with Stewart-Peterson Inc. You can reach Bryan at firstname.lastname@example.org. Scott Stewart is president and CEO of Stewart-Peterson, a commodity marketing consulting firm based in West Bend, Wis. You may reach Scott at 800-334-9779, email him at email@example.com
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