TOP FARMER WEEKLY PERSPECTIVE 10/21/2022 BY BRYAN DOHERTY

Adding Value to Stored Corn

With harvest quickly approaching 50% or more complete, many corn producers are relatively certain about their total production. If you are storing, your goal is to capture basis improvement, price improvement, or both. If willing to take additional risk, consider selling call option premium. This is done through the writing (selling) of call options. It is suggested to sell calls that are out of the money. Out-of-the-money call options are above the current futures price. The level of option that you sell is called the strike price. As an example, a March $7.50 corn call is out of the money if March futures are trading at $6.80. The 15-cent represents what is known as time value. Time value can fluctuate as the futures market moves. Over time, unless the futures market rallies, time will erode the value of the call to a point where it could be worthless on the last trading day.

When you sell a call option, you give someone else the right to own futures (not the obligation). For that right, you collect a premium. Premium is the price of an option. You are also in a marginable position with unlimited risk. While that doesn’t sound very appealing, keep in mind that a call option gains value when the futures price moves higher. Your stored grain will likely be gaining value as the futures price rises. As an example, if March corn futures are trading at $6.80 and you sell a $7.50 March call option for 15 cents, you stand to gain 15 cents at expiration date (last trading day) in February if March futures are at or below $7.50. Your unpriced corn in storage should have gained value as well. Assuming no basis change and a move from $6.80 to $7.50, your corn in the bin would have gained 70 cents. What if futures are much higher than $7.50? You would still collect the 15 cents, however, you would either need to buy back the option to exit or accept the option being exercised. That means you would be assigned a short March futures at $7.50. Your breakeven is $7.65 prior to fees and commission.

You could view this as a win-win. Selling call options against stored grain does not protect the price of what you have in the bin. It does, however, provide an opportunity to add value to your final selling price. Be sure to have a conversation with your advisor so that you are fully aware of margin call requirements when entering the position and additional margin call requirements that may arise. Have a thorough understanding of the risk of this position. This strategy is not for everyone. However, if you’re relatively certain the market may have a finite upside potential or you are willing to accept a hedge at a higher level, this strategy may have merit for your consideration.

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.

Author

Bryan Doherty