November 7, 2023
Most grain farmers are in a transition period – reflecting on the ’23 harvest and yet looking ahead to ’24 crop budgets and goals.
As you begin to manage the next crop year, consider put options (price floors) to protect unsold grain. Once fall arrives, a significant portion of the grain that isn't stored on the farm is priced. As these sales are executed, we reduce the number of put floors in place and transition to call options.
It is important to reestablish and rebalance your positions as each grain portfolio evolves and as the year progresses. Employ wise risk management and utilize available tools help maintain control and mitigate risks on both fronts.
Managing your grain operation can be tricky as inputs are bought around the first of the year to establish your breakeven point. It is then another year until the crop is in the bin, and it doesn’t end there. We then have another eight months until the following July/August arrives and the marketing year ends.
Call options help to get our whole team into the end zone and allow us to stay in the market to take advantage of a future rally. From there, we manage the basis and carry by delivering the physical grain when the market wants it, and we can use the calls to hold our long position. Call options are very reasonable in cost when weighed and compared to the risk and the cost to hold unsold grain with current interest rates.
Protect next year’s crop value
Now that we are nearly through harvest, producers often ask about protecting next year's prices. Many of my younger farm clients who expanded acreage have been nervous. If they increased from 300 to 600 acres and made $100 an acre last year, all it takes is a loss of $50 an acre to give it all back.
Most of my producers have said they feel comfortable setting floors with the put option to defend the breakeven point now that fertilizer cost is down. Not only are we protecting our breakeven, but we are also protecting our spring crop insurance price, and both are crucial for our business.
CBOT Prices as of 11.06.23
Some producers aren’t excited to make a sale until price rallies above $5.50 or $13.50 per bushel. Because of this, we are using put options so we can be in a bullish position and buy some time to discover if we achieve those levels.
The short-dated options are another way to defend your position. They work well if the producer is comfortable making sales by June/July for new crop. If we get a rally this spring or summer, we’ll have calls protecting those early sales we made on old crop bushels. Those calls will then help finance our new crop puts as we increase their protection level to a higher price.
The ultimate goal is to have a plan that gives control and embraces volatility. Many producers must be accountable and present their marketing plans to their business partners. Nowadays, many farms operate as entities with multiple people involved, and often, there are only one or two individuals responsible for making marketing decisions. It may not always involve a business partner; it could also include other associates, such as your banker, when discussing purchasing plans.
Create a team and a plan that positions you ahead and in control of your future.
Contact Advance Trading at (800) 747-9021 or go to www.advance-trading.com.
Information provided may include opinions of the author and is subject to the following disclosures:
The risk of trading futures and options can be substantial. All information, publications, and material used and distributed by Advance Trading Inc. shall be construed as a solicitation. ATI does not maintain an independent research department as defined in CFTC Regulation 1.71. Information obtained from third-party sources is believed to be reliable, but its accuracy is not guaranteed by Advance Trading Inc. Past performance is not necessarily indicative of future results.
The opinions of the author are not necessarily those of Farm Futures or Farm Progress.
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