Consider These Option Strategies Mid-Year

When the corn has tassled and the soybeans are setting pods, a lot of farmers look to their bins and find that there’s plenty of bushels to be sold. That means by mid-year, they are looking for opportunities to sell that remaining crop for as much profit as possible.

The problem with marketing grain mid-year is that we are most often in a US weather market. That means that the market is responding to US weather events, and it can mean significant ups and downs, which in turn means fund money is moving in and out of the market in a hurry. Unless you’re ready to pull the trigger at a moment’s notice, it’s a good idea to create some option strategies to get you through this volatile time of year.

First of all, take a close look at your remaining bushels in the bin. While I don’t expect farmers to forward contract 100% of their crop each year, I typically don’t want to see more than 10-25% of total bushels remaining in the bin by July 4.   

For those unsold bushels in the bin, consider the following strategies:

  • Buy puts, which will lock in a floor for your bushels. This gives you the right to sell at the specified price if the market moves lower but doesn’t confine you to any obligation. If you buy puts at a profitable level, you have the option of selling those bushels to ensure you don’t take a loss later in the summer.
  • Buy calls, which can add value to your existing contracts by increasing the value of your crop. Again, this gives you the right to buy grain at a specified price but doesn’t require you to make that purchase.
  • Watch basis closely and lock in when it’s advantageous. In some areas this time of year, the spreads are widening, suppressing basis. Know your local basis levels well.
  • Look at opportunities to roll your contracts. Not all contracts can be rolled, and some contracts (hedged contracts, for example) must be done the month prior to the end of the contract period. However, rolling contracts may be a good option to consider if you have remaining bushels in the bin.

Option strategies can mitigate risk for the period of time specified in the contract, and still allow you to take advantage of a rise in market prices.

Second, turn your attention to your crop in the field. By the end of summer, it’s a good idea to be around 60-80 sold. I should also note that a normal hedging program will re-own hedges a couple of times a year, to manage risk and positioning within a fluid market. This means your position sold might fluctuate outside of the given range.

Generally speaking, we typically find that farmers underestimate their production by about five percent, leading to farmers believing they are more sold than they actually are. This leaves farmers prone to selling that “extra” five percent during historically low harvest prices.

Finally, it’s important to note that by mid-summer, any remaining bushels in the bin may suffer in quality. Regardless of the price you sold those bushels for, low quality grain will most likely be docked at the elevator, leaving you with less profit than what you anticipated. Work closely with your grain advisor to evaluate if there are option strategies suitable for your farm so you can continue to sell high quality grain.

 

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