Corn: A Game Changer . . . .

[farmaholic]

Volatility is the traders friend?

[TechAnalyst]

Hard to take advantage of strong commodity markets if you don't have much to sell.

Can options ever make up for dismal yields? Are there enough "plays" to be taken advantage of?

Something is telling me it isn't that lucrative, or more people would be doing it.

The Cos/exchanges writing the options proobably don't lose??????

Anyone?

Options are ideally suited for a situation like this. A call option gives you the right but not the obligation to own a certain quantity of a commodity at a set price (the strike price). In the case of corn, it is 5,000bu per option. By purchasing calls as another form of insurance against a crop failure before it develops, you are securing the right to have product to sell even if you can't produce it. Keep in mind, it has to be a large enough of a production issue to impact the price. For a local failure, they won't likely help.

As an example, on May 13th, you could have purchased December $5.00/bu corn calls for $.02/bu. For the right to own 200,000bu of corn at $5, it would have cost you $4,000 US plus commissions. That was because the trade was certain the crop would get planted, it always does, and it's always a bumper. Dec futures traded around $3.70 bu that day. Now that it is clear they have a very serious problem, Dec corn is at $4.55 and the $5.00 call is worth $.23 or $46,000 USD. If the eventual crop is small enough a 2012 supply situation develops, a return to those prices with a high of almost $8.25 would be possible.

Ideally, if you want to buy call options to protect against a crop failure, you would want to use the commodity that is primarily grown in your area. Normally the proper strategy would be to buy canola or Minneapolis wheat calls for the prairies or oat calls for southern Manitoba farmers but right now politics have messed up the picture for our commodities so much corn or soybean options would likely have been best.

As far as quantity, you would likely want to consider your expected production. If you normally produce about 100,000 bu of various crops on a 2,000 ac farm, that may be a good starting point. It really is like any insurance policy were personal attitudes towards risk management is the most important.

Hope that helps...

[Agvocate]

Key thing to remember in that strategy is that vol has changed significantly since may. Vol is basically the premium the option writer needs to write the option based on how likely it is that prices move to that level. Sideways markets, low vol, big volume big daily moves = high vol.

Higher the vol, the higher the cost of the option.

[TechAnalyst]

In short, the time to implement the strategy is when it looks like you won't need it, not once it's hitting the fan.

[TechAnalyst]

I don't want to be a nuisance but I would like to highlight what looks to be a very important development on the corn chart.

Prices gapped higher following the US Memorial Day long weekend when it became clear that the planting delays could be serious. That simply means the lowest price traded following the long weekend was above the highest price traded in the previous week. Gaps are usually filled as buyers wait for prices to fall to the previous weeks high at a minimum. If buying is aggressive enough, the gap will remain unfilled. That is exactly what has happened and the gap remains to this day, in fact it occurred again over the following weekend.

This could be critical as it would be viewed as a breakaway gap, a sign of very aggressive buying. If found on the weekly charts, it usually signals a significant move ahead.

It is also important because the traders that don't know the difference between a cow and a combine do know that this demands attention. Once both the fundamental and technical traders start to look for prices to do the same thing, the likelihood should increase.

Just a thought...

[farmaholic]

Thanks to the people who contributed to this thread. Interesting to read.

Techanalyst, your example indeed shows there are times buying the option can pay dearly. Looks like big price swings are needed to see those kinds of results?

Because I don't know I have to ask, but I have a feeling I already know the answer.....is there an ability to pay to roll an option or is there never a need to? I've only ever heard they expire worthless if not used.

I have never considered futures and options trading because I don't understand it beyond DDCs, futures first, or basis contracts that you can pay to roll or price against before their deadline.

I still wonder what percentage of grain producers actually do use options.

[TechAnalyst]

Yes, this strategy would need a significant move in prices to provide a large return. It is intended to make sure you don't miss out on a surge in prices due to a crop failure.

You can sell the calls at any time up to expiry (late November for December calls) and replace them with higher strike prices if you wish. The only cost is the commission the broker charges. In the above example, if corn rallies to $6.50/bu you could sell the $5/bu call and buy a $6.50 call, pocketing the $1.50/bu and still have the right to own the corn.

As far as the amount of producers using options in their risk management and marketing plans, I would suggest not many do. I believe a lack of understanding and comfort with the subject is likely the greatest reason. That is why I try to provide insight if possible. Maybe it will help.

[errolanderson]

Thanks to the people who contributed to this thread. Interesting to read.

Techanalyst, your example indeed shows there are times buying the option can pay dearly. Looks like big price swings are needed to see those kinds of results?

Because I don't know I have to ask, but I have a feeling I already know the answer.....is there an ability to pay to roll an option or is there never a need to? I've only ever heard they expire worthless if not used.

I have never considered futures and options trading because I don't understand it beyond DDCs, futures first, or basis contracts that you can pay to roll or price against before their deadline.

I still wonder what percentage of grain producers actually do use options.

farmaholic, options trading is another tool in a grain grower or livestock feeder toolbox. Personally, I’m not a fan of farm storage as this places heightened liabilities on the grower. Realize many factors impact the decision to store or not. Call options can be used to replace cash sales. This strategy injects cash flow and limits your risk to the cost of the call premium, far less risk then storing grain in a bin unpriced. Storage losses due to grain going out of condition is the worst case scenario.

Put options can guard the downside in markets without a production or delivery commitment. This is huge as the grower takes control of the marketing decisions. Believe that a marketing plan involves the use of cash contracts and a commodity trading account. Some growers begin with DDC contracts up their production comfort level than begin to scale in put options should the market rally into summer.

In the cattle feeding business, put options are the profit in feeding cattle right now.Unhedged cattle are now taking as much as a $300 hit per animal. Producers tend to view commodity trading as pure gambling. And yes, without discipline and a market plan, it is gambling. But tied to a disciplined plan, the use of option trading can be very beneficial to lower overall business risk.

I’ve traded now for more than 30 years and have seen about everything. But nothing makes me feel better than when a grower or feeder becomes a solid business risk manager willing to protect profits as they appear.

[sumdumguy]

s

We made our money on unpriced grain in the bin. Not saying that futures markets wouldn’t work but we aren’t wired that way. It would take quite a bit of education and a lot of dedication. Glad it works for some though.

[farmaholic]

s

We made our money on unpriced grain in the bin. Not saying that futures markets wouldn’t work but we aren’t wired that way. It would take quite a bit of education and a lot of dedication. Glad it works for some though.

There is truth to that statement. And I also understand the risk of spoilage and being on the wrong side(long) in a falling market.

There is still something to be said for physical possession of the grain as well.

Some commodities are best held in the bin because there are no futures and options contracts to speculate with. And the futures and options commodities that you could play with are flat without any potential.

I don't think that there is a right answer, but I do appreciate the people with a good handle on futures, calls, puts and chart analysis giving us their input and opinion.

[errolanderson]

92% of the US corn acres have been planted. That leaves more than 7 million acres unplanted compared to intentions.

The best progress: Iowa 98%, Nebraska, 98%, Minnesota 99%
The slowest progress: Illinois 88%, Indiana 84%, Ohio 68%,
Conditions unchanged week over week with 59% rated “Good to Excellent”

This crop progress report didn't feed the bull today which could led to moderate long liquidation (profit-taking) . . . but choppy price action ahead.

[errolanderson]

Apparently, the corn stocks-to-use ratio may slip below 7% . . . the 2nd time ever this low in the past 50 plus years.

Crop progress showing Iowa planted may contribute some long liquidation today, but fundamentals do suggest a volatile Jul/Aug weather market that is apt to persist right into the harvest season.

This will continue to support all grain markets (IMO) including pulse markets, feed markets, canola. Wheat will watch hot, dry conditions in Russia right now as well.

Interesting times group . . . .

[furrowtickler]

Thx for all your info Errol 👍👍

[Agvocate]

Pretty good break overnight and then a bit of a bounce back in the day session. Market may look to focus on beans a bit more in the next few weeks. Beans still being planted with more wet weather in the forecast and the thought that the price spread between corn/beans favors 2020 corn planting a little too much. Bean planting's were 2% below expectations.

Canola has the chance to come along for the ride. I still can't buy into a wheat rally personally and have sold new crop on the recent move.

[rumrocks]

Errol, I've been watching lumber futures for a while now with the big run up this winter, then the big fall and now it's seems very choppy. This seems unusual, how big a factor do hurricanes, tornadoes, and forest fires have on the lumber futures, and do hedge funds speculate in this commodity.