Farm Progress is part of the Informa Markets Division of Informa PLC

This site is operated by a business or businesses owned by Informa PLC and all copyright resides with them. Informa PLC's registered office is 5 Howick Place, London SW1P 1WG. Registered in England and Wales. Number 8860726.

Serving: United States

Sold too early? Get control of your crop’s profitability

Thomas M Barwick INC/Getty Images Businessman using phone with hand on forehead. Frustrated man.
It’s time to make decisions that keep you in control of grain pricing on multiple crop years.

Did you sell the 2020 crop too early? Is it impacting your 2021 plans? If you control old crop, the chances to be successful on new crop increase. If you no longer control the 2020 crop your ability to be successful in managing price on the 2021 crop can be a bigger challenge.

This comes from the frustration of selling early and missing out on a future price rally.

In a year that started out with talk of the most bearish of possibilities, the 2020 crop marketing year has flipped to one of higher prices and opportunity. The reasons for the change in price have been well documented. They were not as easy to see back when the 2020 crop was being planted.

Nobody knows where price is ever headed, yet there are a lot of people out there trying to convince you otherwise. No one ever knows; 2020 has been an example of that.

Yet, you can be a successful marketer without this advance knowledge. In my opinion, living with the knowledge that price is unpredictable makes marketing easier.

Sold too early?

A lot of bushels have been forward priced in 2020 and that continues. Some of these sales were recent, but quite a few now lament that they sold “too early.”

How many of these early sales were influenced in part to so-called pricing experts’ bearish predictions?

How could these earlier sales have had a better outcome? And how could this impact our 2021 marketing?

Had call options been purchased at the same time sales were made, especially on those early ones, control would have been maintained.

How call options work

All too often I hear someone say, “I once used calls and they didn’t work.” I am certain that since options were reintroduced in 1983 that they have worked. They have done what they were asked to do.

My assumption is that some believe options “working” means they get sold for more than you paid for them. That’s fine if that happens, but there is much more to it.

Let’s assume you price your beans at $9 in the cash market and purchase a May $9.40 call for 25 cents. This means you have asked the May soybean market to offer you value at $9.40 and above; the first 25 cents is your premium paid. If futures travel to $10.70 the option will have a value of at least $1.30.

This has always been the case, so yes, options work. They do what you asked them to do, which is provide intrinsic value at the purchased call strike price you purchased above. Now it comes down to managing this price increase as the opportunity is presented.

So why would anyone say a call option doesn’t work? I suspect it happens when the premium paid goes away in full or in part. If beans fall to $8 and the May $9.40 call value is zero, it worked as you asked. You asked it to increase in value above $10.40 and the market chose to go another direction.

We would rather have the higher sale versus current price working in our favor. Measure your net sale, which is the sum of price sold, option profit/loss, storage saved, and interest savings.

Locked up pricing decisions

Those who sold the 2020 crop too early might find themselves locked up on making pricing decisions for the 2021 crops and beyond. However, it has been my experience that those who sold the 2020 crop early but purchased calls are the ones planning and executing on the 2021 crops. Why? They are in control of price.

Buying calls to hedge against sales cannot be a practice you do in some years and not others. Inevitably you will miss the years they work well if you try to do it this way.

Find a way to appreciate the consistency of owning calls after sales are made, and you will find a way to be in control of old crop and new crop bushels regardless of price movement. You will make better decisions, with less emotions, based on your farm’s opportunity and economics.

Contact Advance Trading at (800) 664-2321 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. Examples are used for illustrative purposes and should be considered hypothetical.
The opinions of the author are not necessarily those of Farm Futures or Farm Progress.
Hide comments
account-default-image

Comments

  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.
Publish