A common theme throughout this year in the markets has been to expect the unexpected and be prepared to manage price risk. From planting corn in June, to the December futures high in July of $4.7325, to the missile strike on the world’s largest oil stabilization facility in Saudi Arabia which caused oil to surge up to $63/barrel, to the COVID-19 virus which has led to the decline in ethanol due to the lack of fuel demand and ultimately oil trading at a negative $40/barrel. This year has been full of surprises (to say the least) and has only further emphasized the need to manage risk in the markets. With the current futures market pushing towards $3.00 corn futures, the need to ship/market bushels has still not changed. A couple strategies that we can implement would be the Minimum price contract, the Min/Max contract, and utilizing Free Price Later.
- A Minimum Price contract involves selling cash and buying a call option. This allows you to ship the grain today, provides a price floor (in case the market gets worse), while also allowing you to retain your future upside potential. One of the reason this may be a good strategy right now is that even though we want prices to go higher, they may go lower, and this contract provides a price floor. If/when the market rallies, we can still capture it. This would also be a good strategy if you have wet corn still in the bins at home and want to get it shipped before this weather warms up too much more.
- A Min/Max Contract is pretty similar to the one above. It also involves selling cash and buying a call option. It then goes one step further and sells a call option to help cover the cost of the call option that we purchase. Similar to the Minimum Price, when we buy a call option it sets ourselves a price floor or bottom so that we can’t go any lower. When we incorporate a call option sale, it cheapens up the cost of the price floor that we just bought and it provides a price ceiling. It comes with some risk/reward- a cheaper cost, but also a price ceiling that you are capped out at if there is some sort of a grand rally later on in the year. Who may this contract be for? If you want to cover your downside risk while not throwing any more money at this crop as we are sub $3.00 cash (both old crop and new crop). Why might someone want to cap their upside potential? In a year with really bearish news (current lack of fuel and ethanol demand) and limited upside potential (currently on our way to plant 97 million acres of corn) it may be worth the risk of limited upside potential to secure a better bottom side price. One of the more common uses for this tool is for the remaining 15-20% of production that isn’t protected by your crop insurance. You won’t get rich as there is a ceiling, but you also won’t lose your shorts in case this market gets worse.
- Free Price Later is another strategy that allows us to ship corn and price it later. If we don’t like the current cash price and don’t want to sell it, this would be a way to ship the grain (especially if it’s wet!) and not price it yet, while also not paying any storage fees. The two cautions with this strategy is that it does not provide downside price risk protection and that it has an ending date of July 31st.