Published on Monday, April 01, 2019
Several months ago, I wrote about the importance of developing your grain marketing plan. That plan should help you understand your cost of production and determine a breakeven price at average or crop insurance (APH) yields. You should be thinking about the price where you are willing to begin selling your new crop. I have targets in mind for my plan and will be watching for opportunities to price during the “too season” — too wet, too dry, too hot. The "too season" is the best opportunity in the spring/summer market.
Personally, I am targeting $4.15 Dec 2019 corn and $9.60 Nov 19 soybeans to start pricing. You need to think about at what levels you want to start and how to execute your marketing plan over time. Specifically, how many bushels to price at each price level and how you are going to price those bushels. I like to price cash up to 50 percent of my production, and then protect the balance with puts later in the season. This helps me spend less for time value on the put options.
I think this plan makes sense because it gives me revenue protection on 100 percent of my crop and upside on 50 percent of my crop if it continues to rally later in the summer. I also know that if I sell, I can roll my sales forward if we have a big crop and I can make my grain bins earn the “carry in the market” — more on this another day.
I have observed that some like to “watch it” and decide later on selling. I have found this can work, but often we get busy, forget, or just don’t sell enough with this approach. I prefer to get started when I hit my targets and look to sell into a rally in various increments. This is what we want to happen as it brings up our average. I also think averaging contracts during the spring and early summer can be a good strategy. They add discipline (bushels priced each day) and some diversification (help you get more sold in a seasonally good time).
With the large carryout, improved South American weather, and “tariff talk,” I have been more nervous about next year’s soybeans, so I am more willing to sell sooner. I also have a couple cards that I can use to either protect a profitable price, if I don’t want to sell cash, or reown bushels, if I have sold cash.
Next, I want to spend time discussing different options and how they can work for you. I think of options like insurance. If you buy an option, you are buying insurance. The more time you buy, the more expensive the insurance is. The deductible is the strike price (the more likely they are to be used, the more expensive they are.) For example, a $9.00 Nov 2019 put will be more expensive than an $8.00 Nov 2019 put. This is because $9.00 is more likely to be exercised because it is closer to the market or closer to being “in the money.”
There are Two Types of Options
Puts: This gives the buyer of the option the right to sell at the “strike price” at expiration. For this right, the buyer pays a premium. This protects revenue or price, making it a bearish strategy - price is going lower.
Calls: This gives the buyer of the option the right to buy at the “strike price” at expiration. For this right, the buyer pays a premium. This enhances sales, making it a bullish strategy - price is going higher.
I am going to focus on puts to protect a price or revenue. At the time of writing this article, futures and put option prices are as listed in figure 1 below. Note how full December $4.20 and full November $10.00 puts are more expensive. This is because they are in the money by 20 cents and 40 cents, respectively.
There is a substantial risk of loss in trading futures and options, therefore you should carefully consider whether trading is appropriate for you in light of your experience, objectives, financial resources and other relevant circumstances.
Author: Peter Schram
Categories: CropTalk, 2019
Tags: CropTalk, grain marketing, Customer Talk