TOP FARMER WEEKLY PERSPECTIVE 1/28/2022 BY BRYAN DOHERTY
Moving Cash, Staying Long
Winter is moving by quickly. When sub-zero weather keeps you indoors and busy with “winter projects,” the gnawing feeling that spring is soon to be upon us grows a little each day. The need to stay on schedule in moving grain from storage to buyer becomes more important, as well. The overall price trend is higher with futures, recently closing at or near contract highs. Not selling is working. However, the reality is that you likely must sell or, at least, move grain sooner than later. The need to cone bins, take advantage of frozen roads, and move crop is looming larger. And there is also that need to generate cash flow and pay bills.
If you want to stay in an ownership position (long), then consider various paper tools. Call options give the buyer the right to buy futures, and not the obligation. Three primary reasons calls are purchased are to (1) retain ownership of grain sold, (2) hedge against future purchases (as a buyer of corn), or (3) for speculative purposes. Calls are traded at exchanges. Corn, soybeans, and soft red winter wheat contracts are traded at the Chicago Board of Trade. For those who want or need to move grain, calls are a great fixed-risk tool to re-own the market. Calls can be bought through a broker, and sometimes through elevators when attached to a cash sale. Premium, otherwise known as cost, is determined in the marketplace. A call’s premium reflects time until expiration of the contract, volatility, and proximity to the underlying futures. The strike price is the price level you purchase. An example of a strike price might be a $6.00 call. From a producer’s perspective, the cost of a call option that is considered at-the-money (the same strike price as the current futures price) may be close to the cost of commercial storage.
Buying a futures contract is also a way to re-own. However, without risk orders, risk is unlimited. If you need to move grain because of circumstances that limit your ability to store, owning futures could be considered a replacement for stored grain. Futures, however, will not allow you to benefit if basis improves, though you are also not subject to basis working against you. If you believe the market may move higher and want to shift away from the unlimited risk of falling prices, futures may not be your best choice. Based on your situation, you may want to stick with buying fixed-risk call options.
Marketing is simple with hindsight and challenging when looking forward (which is often a best guess). Knowing how and when to use the right tool for your risk tolerance and situation can provide confidence and comfort. The is no absolute correct answer. Know, however, that there is probably a best tool for the right time and personal situation. Use the tool that best fits you. Understand how the tool works. Consider the cost and specific parameters, such as how long the contract will last and the expected value at expiration, based on various futures prices at that time. Lastly, make sure you have all your questions answered sufficiently before executing any strategy.
If you have any questions on this Perspective, feel free to contact Bryan Doherty at Total Farm Marketing: 800-334-9779.
Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.