Since the February price low, December 2024 corn futures have slowly rallied 50 cents, getting near the $5 a bushel price.
Can prices continue to climb higher during the month of June? Or will the notion of 2-billion-bushel carryout stop the corn price rally in its tracks?
From a marketing perspective
With the United States corn crop slow to get planted, and the summer weather forecast still developing, farmers are unsure of what type of corn production they will grow this year. An uncertain size corn crop growing in the fields is nerve-wracking for any producer. It is hard to market what you are unsure will grow. 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.
But what if the summer weather forecasts turn out to be pleasant and not drought filled? Improved weather conditions in the weeks ahead might weigh bearish on trader mindset and push prices lower in the short term.
When you consider that December 2024 corn futures have rallied nearly 50 cents (especially as 2 billion bushel carryout remains a reality for now), there is reason a producer may want to protect this recent rally.
One way to do that is to buy a put option. Remember, if you’re buying a put, you’re protecting a price floor for your grain. If the market should instead trade higher due to drought, you are not dealing with margin calls, and you are able to take part in the rally with your cash sales. However, if the weather turns “perfect,” you’ll be thankful you have a price floor protected, as price may have fallen lower.
Another way to protect a price floor on unpriced corn is to use a short-dated option. 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, there are pros and cons that need to be measured. Let’s first explain what a short-dated option is and how it works.
The term “short-dated” refers to a shorter window before the option’s traditional last trading day, otherwise known as an option expiration. You’re able to protect new crop December 2024 corn futures prices, yet with a shorter window of time.
For example, if you were to buy traditional December 2024 corn put, it would expire on Nov. 22, 2024. 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 July short-dated option expires on June 21;
· The August short-dated option expires on July 26; and
· The September short-dated option expires on Aug. 23.
Full visibility of how 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. A big benefit is that short-dated options can provide farmers an opportunity to reduce out-of-pocket cost and still protect a price floor.
They may be useful for such events as upcoming U.S. Department of Agriculture reports, near-term weather events or any other situation where protection for a shorter period of time 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).
Prepare yourself
In the coming weeks, continue to focus on cash sales, and make sure you have a good handle on the crop insurance you purchased this year. History would suggest that the coming weeks will have substantial price volatility for grain futures. Which way prices trade largely depends on Mother Nature and the USDA.
We can never guess what a market will do, or what Mother Nature has in store for us, but using risk management and being prepared to protect value is something within your control.
If you have questions, you can reach Naomi at [email protected] or find her on twitter @naomiblohm.
Futures and options trading involve significant risk of loss and may not be suitable for everyone. 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. Total Farm Marketing refers 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. Stewart-Peterson Inc. is a publishing company. SP Risk Services LLC is an insurance agency and an equal opportunity provider. A customer may have relationships with any of the three companies.
