Headline-driven markets are tough. Not only do the headlines change day-to-day, so does the interpretation of them. As news is discovered and headlines are written, commodity markets adjust by swinging too far in one direction then back to the other.
As the news cycle intensifies, price swings become more violent and take less time.
March soybean futures spiked to $17.65 on Feb. 24 – the day Russia invaded Ukraine. The next day, the contract traded as low as $15.90. That’s a two-day range of $1.75 and represents a $90-per-acre change in revenue potential at last year’s national average bean yield. That’s high-level risk.
March corn on March 4, ahead of a war-torn weekend, briefly touched $8 before quickly retreating to $7.50.
March soft red winter wheat (as of early was March) traded above $13.
CAPTURE PRICE SPIKES
Markets normally touch these extreme prices for very short periods of time — such a short time that it’s difficult to react to price spikes by making sales. But if you are willing to imagine dynamic moves and make a plan to capture rare marketing opportunities, it doesn’t matter how long markets trade at a price. What matters is price targets are hit.
Setting price targets is an effective way to capture price spikes in headline-driven markets. Markets can interpret a headline as bullish when a session opens, but after a sharp rally (even a limit-up move), that same market might decide the headline has been factored into prices. Or it might change its interpretation of a headline.
Setting scale-up price targets well above current prices puts you in position to capture an emotional price spike. But once targets are hit and cash sales are made, the upside price potential on those bushels is gone.
Reowning cash sales with a call option reopens upside potential at a known risk, because the most that can be lost on the position is the premium paid for the option.
That makes it easy to calculate the net worst-case scenario for this sell-and-replace strategy. On rallies following the invasion, corn and soybeans spiked to price highs, then prices backtracked. In this case, buying call options at price targets (that may be well above current prices) would be buying out-of-the-money call options, reducing costs even in highly volatile markets.
BEST VERSUS WORST
The worst case (or minimum price) is calculated by subtracting the premium paid for the call option from the cash price secured when the price-target was hit.
The best-case scenario is an extended rally. The premium of the call option will rise with futures, adding value to sold bushels.
Most often, the call option position will be liquidated before expiration and you add premium appreciation to the cash price. (If 50¢ is paid for the call option and the long is liquidated at 75¢, 25¢ is added to the net sales price.) It’s a conservative marketing strategy to use in extreme markets.
As Farm Journal Economist and host of the “AgriTalk” radio program, Chip Flory helps farmers understand the markets and seize opportunities.
