Think of Puts as Critical Inputs to the Success of Your Operation

What’s Happened….

With corn futures currently trading near $4.00 and soybeans near $10 per bushel on futures, it is easy to look back and wish you’d done something to protect prices earlier in the year. Since January, prices in both commodities have steadily moved lower. Corn moved from near $5 and soybeans near $12. Prices are always relative to something, often other prices. The reason many farmers didn’t defend/forward sell $5 corn and $12 soybeans is because those prices were below the previous harvest price. Fear of committing cash sales too soon swayed producers from defending against a scenario of continuous declining prices. Yet, growing world supplies, a weakening global economy, and good weather in the Southern and Northern Hemispheres pushed prices steadily lower over the last nine months.

Why this is Important….

Preparing for various price scenarios is a critical element to successful marketing. While forward contracting at low prices was not all that attractive, using put options to establish a price floor proved to be a valuable strategy. As a reminder, the owner of a put has the right and not the obligation to be short (sold) futures. Improved seed genetics, better equipment, and focused farmers increase the chances of crop success. If Mother Nature cooperates, big crops usually ensue and prices decline, sometimes so fast it is akin to catching a falling knife. Preparing in advance for this potential needs to be a way of thinking.

Establishing a price floor through the use of puts can be just as important to the success of your operation as using the right equipment to get the job done properly. You change the oil in your tractor, grease bearings, and inflate tires to the proper levels. Investing in the time, oil, filters, and grease is routine and a given on every farm operation. You wouldn’t think of not doing this. Using and investing in put options can be just as important and should be considered with the same level of priority. Winging it and hoping for a price rally while doing nothing to guard against lower prices can be costly financially and costly to your own mental health.

What can you do about it?

Have critical and meaningful conversations with a professional advisor who can help guide you to implement the right put option strategies for your operation. Develop a mindset that using put options is paramount for your success and to not do so can be a recipe for financial ruin. There should be no negotiation in having a well thought-out strategy. If needed, get your lender on board with your vision to protect your farm income.

You expect to produce great crops and so does every farmer. Why then, wouldn’t you, without question, defend yourself against an expectation for lower prices? You work hard to create success, so be sure to work strategically to protect what you have earned.

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 30 years at Total Farm Marketing and a 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 tools and markets, listens, and communicates with intent and clarity to ensure clients are comfortable with the 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