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Ag Marketing IQ: As The Big One looms, grain farmers can take steps now to manage risk, protect value, and weather any surprise market storm that develops in the aftermath of the Jan. 12 report.

Naomi Blohm, senior market adviser

January 4, 2024

6 Min Read
Grain bins
Getty Images/iStockPhoto

So far 2024 has had a muted tone for corn futures. A timely recent rain in Brazil and a slight slowdown in U.S. corn export demand is keeping prices in check. Adding to the pessimism is the fact that the funds continue to hold their short positions, which leads to continued overall price pressure.

What’s happened

Many producers have lamented not selling enough during the price rally in summer 2023 because they were concerned about the crop growing in their fields. The drought was real, and crops were struggling.

There was fear to forward contract and commit bushels at their local grain elevators as farmers were unsure of what size of crop they would bring to harvest. It makes forward contracting potentially uneasy because if the crop doesn’t grow, you’re still on the hook to deliver corn to the elevator.

Unfortunately, corn prices are now $1 lower than what was available in summer. And farmers are hoping for a price comeback.

All eyes are now focused on the Jan. 12 USDA report. Will this report offer a glimmer of price rally hope? This report is often dubbed as “the big one” and is associated with dramatic price reaction and plenty of twists and turns in the supply and demand categories, both on the domestic and global aspects.

From a marketing perspective

Implementing a strategic approach is paramount heading into this report. Nearby corn futures are approaching oversold levels on daily charts, and any friendly news from the USDA could spark a significant short covering rally. If you have sold cash corn recently and would feel frustrated if prices rallied in the coming weeks after you just sold your corn, then consider buying a call option. This allows you to retain ownership on paper.

Buying a call option

When you buy a call option, you pay an option premium up front (plus commissions and fees). There is no margin call, and if futures prices trade higher, the call option has the ability to gain value along with a futures price move higher. You can buy a call option for a specific amount of time. The cost of call options increases as you lengthen the time period you are purchasing.

Need something short term? Just to get you through the report?

Consider implementing a February serial call option. They are based on March 2024 corn futures, and they expire on Jan. 26. The cost is significantly less than other traditional call options because they expire quite soon, in nearly three weeks.

Got unpriced grain in the bin? Consider buying a put.

Now, what if the USDA report does not have any friendly information and corn prices continue to slide lower?

If you have unpriced grain in the bin and are fearful of a bearish USDA report, then consider buying a put. Remember, if you’re buying a put, you’re protecting a price floor for your grain. And if the market should instead trade higher due to a bullish surprise, you are not dealing with margin calls, and you are able to take part in the rally with your cash sales.

However, if the report is negative and the corn futures prices trade lower, you’ll be thankful you have a price floor protected.

Protecting unpriced old crop corn

If you have corn in the bin and want to protect against potential lower values in case there is a bearish surprise in the USDA report, then consider buying a February serial put option, which expires Jan. 26.

If you want more time to see how the weather in South America fares, and still protect unpriced bushels in the bin, then consider buying a March put option, which expires Feb. 23. The cost is the option premium, plus commission and fees. No margin calls.

Thinking about protecting unpriced new crop 2024 corn?

Consider price protection with a short-dated put. Short-dated options are gaining more relevance and importance as a tool you might employ to help shift risk or manage opportunity. As with any marketing tool, it carries pros and cons that need to be measured. Let’s first explain what a short-dated option is and how it works.

Short-dated options

The term “short-dated” refers to a shorter window before the option’s traditional last trading day, otherwise known as option expiration. You’re able to protect new crop December 2024 corn futures prices, yet with a shorter window of time. You pay a one-time premium for the option itself (plus commission and fees), and there are no margin calls.

For example, if you were to buy traditional December 2024 corn put, it would expire on Nov. 22. With the short-dated options, you are still protecting December 2024 corn futures prices, but they cost less, because they expire much sooner than Nov. 22, 2024. Therefore, you’re paying less time value in the cost of the option premium itself.

  • The March short-dated option expires on Feb. 23.

  • The April short-dated option expires on March 22.

  • The May short-dated option expires on April 26.

Less cost, due to covering less time. Some feel that by spring 2024, the industry will have a better handle on crop size for both first and second crop corn in Brazil. By then, there will already be guesses thrown out as to the planted acreage size of the U.S. 2024 corn crop.

Prepare yourself

Full visibility of how serial options and short-dated options work (puts or calls and whether it is purchased or sold) and the associated risks are critical to understand for proper implementation.

They may be useful for such events as upcoming USDA reports, near-term weather events, or any other situation where protection for a shorter period may be warranted. Because you’re buying a shorter period of coverage, they cost less, and you’ll save money (relative to a traditional option).

We can never out guess what a market will do, what a USDA report will say, or what Mother Nature has in store for us, but using risk management and being prepared to protect value is something within your control.

Reach Naomi Blohm at 800-334-9779, on X (previously Twitter): @naomiblohm, and at [email protected].

Disclaimer: The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Individuals acting on this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report. Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Examples of seasonal price moves or extreme market conditions are not meant to imply that such moves or conditions are common occurrences or likely to occur. Futures prices have already factored in the seasonal aspects of supply and demand. No representation is being made that scenario planning, strategy or discipline will guarantee success or profits. Any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to Total Farm Marketing. Total Farm Marketing and TFM refer to Stewart-Peterson Group Inc., Stewart-Peterson Inc., and SP Risk Services LLC. Stewart-Peterson Group Inc. is registered with the Commodity Futures Trading Commission (CFTC) as an introducing broker and is a member of National Futures Association. SP Risk Services, LLC is an insurance agency and an equal opportunity provider. Stewart-Peterson Inc. is a publishing company. A customer may have relationships with all three companies. SP Risk Services LLC and Stewart-Peterson Inc. are wholly owned by Stewart-Peterson Group Inc. unless otherwise noted, services referenced are services of Stewart-Peterson Group Inc. Presented for solicitation.

About the Author(s)

Naomi Blohm

senior market adviser, Total Farm Marketing by Stewart Peterson

Naomi specializes at helping farmers understand how to manage cash marketing needs and understand the importance of managing basis, delivery point considerations, cash flow needs and storage capacity. She earned her Bachelor of Arts in Political Science with a minor in Agriculture Business at the University of Wisconsin in Platteville. She has a Master of Science in Adult Education with an emphasis in Ag Economics from the UW-Platteville and a Master Certificate in Global Education, from the UW-Oshkosh.

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