Time to Use Put Options

What’s Happened…

Corn and soybean futures have reached their highest level in two years. This is somewhat surprising, considering the most recent USDA WASDE reports indicated ample supplies. The report has line items for both supply and demand. When the two figures are added together, a projected remaining supply (carryout) is calculated. Corn carryout is forecast at 2.1 billion bushels, a figure suggesting more than adequate supply left over at the end of the marketing year (August 31). Similarly, soybean carryout at 350 million suggests the same.  

The Southern Hemisphere’s 2026 soybean production appears to be large (likely record-large), which implies the world has ample inventory. While it is too early for a more concrete picture of the Southern Hemisphere corn crop, early forecasts suggest near-record production.  

Why this is Important…

Despite a lack of fundamental support (supply and demand), prices have rallied in the last several weeks. Inflation, rising crude oil prices, or even broad-based buying by managed money (large speculative investments) may be reasons for the uplift in prices. Weaker equities suggest dollars moving out of stocks and into commodities, as money managers seek better investment potential.  

Is there a shift as to how commodities are viewed? Are money managers buying in anticipation of the beginning of a bigger bull market? Many commodities for several years have been hovering at or below the cost of production. Whatever the case, prices offer an opportunity for longer-term sales. The challenge, however, is that prices look strong, and they’re at a crossroads; they look bullish and are vulnerable to a top. 

What can you do about it?

Approach marketing with a mindset of being balanced. Cash sales are critical when prices rally, yet one must be careful not to over-sell. Some cash contracts offer double-up potential. This means that, if prices move higher, you may have to deliver twice as many bushels. This can complicate the decision on how much to sell. 

An important marketing tool to defend against lower prices yet leave the topside open for unpriced cash are put options. A put buyer has the right (not the obligation) to be sold (hedged futures) at the option strike (level of protection). Puts are purchased through a broker or might be available through a grain elevator. These are generally termed a minimum price contract. Keep in mind that minimum price contracts require delivery. A good formula might be as simple as cash contracting 50% of expected production (forward selling, minimum price contracts, hedge-to-arrive) and buying puts on 50%. Establishing a floor of 100% of expected production may provide peace of mind, knowing downside price risk is covered, with half the crop able to participate in a price rally.  

Find out what works for you… 

Work with a professional to find the strategy or strategies that are best suited for your operation. Communication is important. Ask critical questions and garner a full comprehension of consequences and potential rewards before executing. The idea is to make good decisions for the operation and less emotionally–charged responses to market moves, which are always dynamic.

About the Author: With the wisdom of over 36 years at Total Farm Marketing and following across the Grain Belt, Bryan Doherty is deeply passionate about his clients, their success, and long-term, fruitful relationships. As a senior market advisor and vice president of Brokerage Solutions, Doherty lives and breathes farm marketing. He has an in-depth understanding of the markets and marketing tools, an excellent listener, and communicates with intent and clarity to ensure clients are comfortable with their decisions.

The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Individuals acting on this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report. Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Examples of seasonal price moves or extreme market conditions are not meant to imply that such moves or conditions are common occurrences or likely to occur. Futures prices have already factored in the seasonal aspects of supply and demand. No representation is being made that scenario planning, strategy or discipline will guarantee success or profits. Any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to Total Farm Marketing. Total Farm Marketing and TFM refer to Stewart-Peterson Group Inc., Stewart-Peterson Inc., and SP Risk Services LLC. Stewart-Peterson Group Inc. is registered with the Commodity Futures Trading Commission (CFTC) as an introducing broker and is a member of National Futures Association. SP Risk Services, LLC is an insurance agency and an equal opportunity provider. Stewart-Peterson Inc. is a publishing company. A customer may have relationships with all three companies. SP Risk Services LLC and Stewart-Peterson Inc. are wholly owned by Stewart-Peterson Group Inc. unless otherwise noted, services referenced are services of Stewart-Peterson Group Inc. Presented for solicitation. 

Author

Bryan Doherty