3 Ways to Re-own Sold Grain

 

 

What’s Happened….

As of this past Sunday, 91% of the corn and 94% of the soybean crop was harvested, according to the USDA Weekly Crop Progress Report. For many, attention will now focus on marketing. If storage was not an option or bushels were sold for harvest delivery, re-owning on paper is a consideration.

 

 

Why this is Important….

Generally, prices are low during the harvest season, so the likelihood of a price recovery post-harvest may be higher than any other time of year. A simple explanation is that prices tend to reach a low when ample supplies are available to buyers. If you have stored crops, you are hoping for price appreciation. The same can be said if implementing strategies for re-ownership.  

 

The goal is to capitalize on price recovery. Let’s go over three ways to help you reach that goal by re-owning what you’ve sold.

 

 

What can you do about it?

The first strategy is to buy futures using deferred month contracts. This allows you to participate in a price rally. Price risk must be carefully considered. The advantage of buying futures is due to leveraging. That is, only about 5% of the value of the contract is necessary to maintain an order and hold the position. If prices drop, risk is unlimited and margin calls may occur. Margin calls happen when your account drops below a level known as maintenance margin. You must always maintain the required maintenance margin. Contracts are usually liquid, meaning there is ample trade volume for entry and exit. 

 

A second strategy is to purchase call options. The buyer of a call has the right (not the obligation) to be long the underlying futures contract. Most calls that are purchased are later resold. They can also expire without value. The big advantage for call option purchases is that risk is fixed to the premium paid plus commission and fees. There is potential for additional risk if you decide to exercise the option into futures. Typically, a call option will cost about as much as commercial storage on a per-month basis. Where your grain is sold and prices rise, your call is generating revenue and you are in the market with a known risk and time horizon.  

 

The third strategy is called a bull call spread. This is a strategy that buys a call option that is near the futures market (at-the-money) and sells a call option that is out-of-the money, or a distance from where the current market is trading. This is considered a fixed-risk position and has a fixed profit component. The big advantage of this position is when you sell (short the out-of-the-money call), the premium is immediately applied to the purchase price of the long call, thereby reducing the net overall cost if comparing to just buying an at-the-money call. The downside is that profit potential is fixed. Bull call spreads are generally used for cost saving measures with the expectation that rally potential of the underlying futures contract is limited.

 

 

Find out what works for you….

Take time to study these strategies and then have conversations with your advisor. Every strategy has pros and cons. Future contracts have unlimited potential and greater risk. A call option can provide for holding power (can ride the ups and downs of price movement) with a fixed risk and unlimited potential. A bull call spread has fixed risk and profit potential, and gains may occur at a slower pace than futures or a call option. Recognize there is no one strategy that is necessarily best for everyone. Determine which strategy or combination of strategies is the best fit for your operation, cash flow, and risk tolerance.  

 

Work with a professional to find the strategy or strategies that are best suited for your operation. Communication is important. Ask critical questions and garner a full comprehension of consequences and potential rewards before executing. The idea is to make good decisions for the operation and less emotionally charged responses to market moves, which are always dynamic. 

 

 

About the Author: With the wisdom of 30 years at Total Farm Marketing and a following across the Grain Belt, Bryan Doherty is deeply passionate about his clients, their success, and long-term, fruitful relationships. As a senior market advisor and vice president of brokerage solutions, Doherty lives and breathes farm marketing. He has an in-depth understanding of the tools and markets, listens, and communicates with intent and clarity to ensure clients are comfortable with the decisions.

 

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.