Farm Progress

With new revenue insurance policies, farmers can feel much more comfortable selling grain ahead of time.A put option is an insurance policy to protect the price of your crops and livestock.A call option is more like a lottery ticket.

Paul L. Hollis

March 8, 2015

6 Min Read

Statistics tell us that the average American farmer sells the majority of his crops in the bottom third of the prices that were available to him during the year, meaning growers need to start thinking differently about marketing.

“Some marketing opportunities come well before you even plant your crop,” says Mark Gold, managing partner of Top Third Ag Marketing in Chicago.

“For many of you, your granddad told your dad, and your dad told you not to sell it until you get it in the bin. And for 150 years, that was great advice. But now, with the new revenue insurance policies available to us, we can feel much more comfortable selling grain ahead of time than we ever had before,” Gold said at the Alabama Corn and Wheat Short Course held in Auburn.

(Editor’s note: This is part one of an two-part series on grain marketing, based on a presentation at the Alabama corn and Wheat Short Course by noted commodity broker Mark Gold of Top Third Ag Marketing in Chicago).

Marketing is more complex than ever before, says Gold. “Today, we have to watch these markets 18 hours a day, five days a week. If you’re out on your farm checking the markets once or twice a day to determine if prices are going up or down, and you’re trying to beat the pros at the Chicago Board of Trade, it’s probably not going to happen.”

Americans farmers are the best farmers in the world, he says, but growing a crop isn’t the problem right now.

“I wouldn’t be as concerned looking at market prices with just U.S. crops. It’s the world ending stocks that concern me. It’s not like we’re running out of grain here,” says Gold.

In 2015, farmers face greater risks than ever before, he says. “You have high land prices, high input costs, basis risk – not so much in the Deep South – but certainly in the Midwest. And you can’t afford to pay these high input costs and then sell your crops at cheap prices. Managing your risks by becoming better marketers is going to be critical to you maintaining your profit margins.”

Corn/grain fundamentals include, on the bullish side, good soybean demand, especially from China, and possibly reduced acreages in corn and soybeans, says Gold. Bearish fundamentals include poor export demand for corn and wheat, a strong U.S. dollar which limits the export market, and big world carry-outs.

How can you become a better marketer? First, says Gold, you have to spend more time on your marketing plan.

“You have to spend some time on it. You have to make some changes – I want you to spend five minutes a day to become a better marketer. I’m asking you to make a change in your life – to spend five minutes a day doing something you haven’t had to do before.

“Track you basis, start reading some things about marketing, and get more involved in it. Combine effective crop insurance with your marketing plan. We like for our clients to have crop insurance and general revenue insurance because we want our clients to have guaranteed bushels that they can sell ahead of time.”

Looking for opportunities

In the 2014 crop year, the best time to sell was March, April and May – long before you harvested those crops, says Gold.

“So you look for those opportunities, and when you have crop insurance and have guaranteed bushels, you can feel more comfortable selling grain ahead of time.”

Options are a way to manage risks, he says. “A put option is simply an insurance policy you can buy today to protect the price of your crops and livestock, so you sell it in case the price goes down.”

For example, if December corn is at $4.20 per bushel, you could buy a $4 put for 25 cents and put in a $3.75 floor on your corn. If it goes to $3 or $2.50, you’re protected at $4. If it goes to $5 or $6, you’ll lose the 25 cents you paid for the insurance policy, but you can sell the corn at $5 or $6.

“It’s an insurance policy to protect your unsold bushels. We buy put options to protect anything that’s unsold. So if you’ve got grain in the bin from 2014 that you haven’t sold, you need some puts on it. If you plant grains in 2015, you need puts on that grain.”

A call option, says Gold, is like a lottery ticket.

“Once you’ve sold this crop, December corn is out here at $4.20, and I’ve got a pretty good basis, so why don’t I just sell it now? If I buy a put, I’m potentially leaving about 45 cents on the table. Go ahead and pull the trigger and sell corn right now. Now that you’ve sold the grain, look at buying a call option to replace it. If we’ve got December corn here at $4.20, maybe we buy a $4.50 call option for 20 cents. So if corn goes to $5.50 or $6.50, we have that lottery ticket in our pocket in case there are higher prices.”

There are several advantages to buying an option, says Gold. “Let’s say you plan to plant 50,000 bushels of corn next year, and it’s 20 cents per bushel to buy a put option. Each contract with the CBOT is for 5,000 bushels. So if you’re planting 50,000 bushels, you need 10 contracts of these put options. At 20 cents per bushel, it’s $1,000 per contract on 10 contracts, so you’d need to write a check for $10,000, plus any commission. I charge $37.50 for each contract you buy yourself, so my commission is $375.

“So you write a check for $10,375, and you’re protected if corn goes to $3 or $2.50. The No. 1 advantage with any option you buy is that you will never get a margin call. When you spend that money, you know exactly what you’re getting into.”

The second great advantage, he says, is that you have the upside open to you. “A lot of growers are afraid to sell grain because you’re scared that if you sell at $4.20, it might go to $6, and you feel like you’re missing something out there. If you buy the call option, you still have the upside open to you. If you don’t sell the grain and you’ve got a put option, and the market goes up, you’ll have that higher price open to you. Either way you play this game, the upside is open to you in the market.”

Time is the third great advantage to buying an option, says Gold. “If we buy the December put today, that gives us almost one year of protection between now and next December. If we have another 175-bushel yield in this country, or even higher, would it make your life easier to be protected if corn goes to $3 or $2.50? But if it goes to $5 or $7 this year, you still have the corn to sell.”

About the Author(s)

Paul L. Hollis

Auburn University College of Agriculture

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