Marketing Despite the 2022 Headlines
Oct 01, 2022
Zack Gardner
Grain Marketing & Origination Specialist
There are many bearish/bullish risk factors driving our current markets; let's talk through some of them. We’ve got very extreme headlines on both sides of the isle, with many potential black swans out there as well (such as last weekend’s rumor of a military coup in China). With $6.50 cash corn and $13.50 cash beans across the scale, there is a lot of revenue that needs to be protected.
Bearish risk factors:
So how do we market around all of these extreme headlines? Here are a couple of different options (pun intended of course).
Cash Sale- There is nothing wrong with making a cash sale at these levels and taking the money and running. Paying storage on bushels not sold gets even more expensive when you factor in the interest cost of debt not paid down at today’s higher interest rates.
Minimum Price Contract- You can sell $6.50 cash to Lincolnway today for harvest and buy a July ’23 $7.00 call option for $.50. This gives you a price floor of $6.00 cash, while retaining your upside potential with the call option until June 23rd, 2023.
Min/Max Contract- Options are expensive right now with the volatility in the market, so the risk/reward of the standard minimum price contract might not be worth it to some. Another way you can protect bottom side risk while not spending as much is with the Min/Max contract.
Continuing off the previous example:
These are not the end-all, be-all for contracts this fall. These are what I like to think of as additional baskets to put eggs into. They are risk management tools and there is some serious risk on the table this year that we need to protect ourselves against. These types of contracts work for any location and can be for both corn and beans. If you have questions as to how they can fit into your operation, our Key Cooperative Grain Team is happy to walk you through different scenarios.
Grain Marketing & Origination Specialist
There are many bearish/bullish risk factors driving our current markets; let's talk through some of them. We’ve got very extreme headlines on both sides of the isle, with many potential black swans out there as well (such as last weekend’s rumor of a military coup in China). With $6.50 cash corn and $13.50 cash beans across the scale, there is a lot of revenue that needs to be protected.
Bearish risk factors:
- The high US dollar is curtailing US grain exports
- Brazil is currently getting rain, which is providing them a good start on producing a record 150 MMT soybean crop
- The Argentine government is subsidizing the US Dollar to Peso exchange rate for farmers selling soybeans, which has led to ~10 MMT (367 mil. bu.) of soybeans to be dumped into the world market (so far) in the month of September
- Tensions are rising with China over Taiwan. Our most effective sanction is not selling them our ag goods (i.e. soybeans)
- Putin called up another 300,000 people into his military which potentially threatens Ukraine’s ability to export corn/wheat
- A La Nina weather pattern has been predicted for South America for a third year in a row (so their record soybean crop isn’t in the bin yet!)
- Our corn supply is tight and our soybean supply is even tighter. There is still no room for crop production errors in the US crops.
- Ammonia bids seem to keep getting pulled from the market. If producers can’t get ammonia, how do they produce a “normal” yielding crop? Doesn’t that imply that corn should be worth more if there is less of it produced?
So how do we market around all of these extreme headlines? Here are a couple of different options (pun intended of course).
Cash Sale- There is nothing wrong with making a cash sale at these levels and taking the money and running. Paying storage on bushels not sold gets even more expensive when you factor in the interest cost of debt not paid down at today’s higher interest rates.
Minimum Price Contract- You can sell $6.50 cash to Lincolnway today for harvest and buy a July ’23 $7.00 call option for $.50. This gives you a price floor of $6.00 cash, while retaining your upside potential with the call option until June 23rd, 2023.
Min/Max Contract- Options are expensive right now with the volatility in the market, so the risk/reward of the standard minimum price contract might not be worth it to some. Another way you can protect bottom side risk while not spending as much is with the Min/Max contract.
Continuing off the previous example:
- We sell $6.50 cash to Lincolnway. We buy a July ’23 $7.00 call option for $.50 AND then we also sell a July ’23 $8.40 call option for $.15.
- We bought and sold a call option, so our net cost is $.35. The most we can lose with this strategy is the $.35 we paid for it, so our price floor is $6.15 cash ($6.50-$.35=$6.15).
- What is our upside potential? Seeing we sold a call option in this strategy, that caps our upside potential. The difference in the call option strike prices is $1.40 (short $8.400 call – long $7.00 call = $1.40).
- When we put this whole strategy together, we have a minimum of $6.15 cash and a maximum of $7.55 cash. This also provides us with $6.15 cash in hand at harvest to pay off debt, while retaining our upside potential with no storage costs.
These are not the end-all, be-all for contracts this fall. These are what I like to think of as additional baskets to put eggs into. They are risk management tools and there is some serious risk on the table this year that we need to protect ourselves against. These types of contracts work for any location and can be for both corn and beans. If you have questions as to how they can fit into your operation, our Key Cooperative Grain Team is happy to walk you through different scenarios.