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A balanced approach

Agriculture.com Staff 02/29/2008 @ 1:16pm

Corn and soy prices pushed into new contract highs again this week. So far, producers who have taken little marketing action for the 2008 crop have benefited greatly.

However, at some point, doing nothing will probably become costly. From a historical perspective, the corn and bean markets have a tendency to top in the winter months when uncertainty for the upcoming crop is greatest. As time passes and the market has information regarding the crop, prices may be in a downward trend if planting and weather conditions are near normal. With tight domestic and world inventories, the question this year is if markets are close to topping or have a long way to go up. So what should you do?

Our advice is to establish a balanced approach to your marketing. Recognize that the market is offering outstanding opportunity, but as quickly as markets go up they can go down. Sometimes when making marketing decisions it is best for a farmer to ask himself, "Where would I have the most regret?" Will you be sorry for selling at high prices only to see the market go higher, or will you have more regret if you make no sales and prices fall apart? While the regret approach can help, it is probably not well balanced. Our advice is to become strategic and have a balanced approach.

Assuming normal crop conditions, prices could break and potentially drop $2 in corn and $5 or more in soybeans. We encourage producers to forward sell into the winter months as much as 50%. Cover the remaining unpriced 50% with PUT options.

This approach is balanced in the sense that, whether the market moves up or down, you have 100% expected production coverage to the downside with 50% ownership from unpriced crop that the PUT options protect. Taking the next step would be to purchase CALL options against cash forward sales in case of a weather market. It is our belief that if weather becomes a factor, especially drought, prices could double. Therefore, look to buy CALL options to cover forward contracts.

We recognize cash flow requirements for options are higher this year, but bear in mind that futures are at all-time new highs and market price swings could be dramatic. Even though it may be hard to spend the money on an out-of-the-money CALL option, these options could look very cheap if prices rally significantly. One only has to look at the wheat market this year to learn that lesson.

The keys are to budget and manage the option positions. We encourage farmers to be proactive and implement strategy that will keep them balanced whichever way the market goes. Sleep may come more easily.

If you have questions, comments or would like a specific plan implemented for your operation, contact Bryan Doherty at Top Farmer at 1-800-TOP-FARM ext. 129.

Corn and soy prices pushed into new contract highs again this week. So far, producers who have taken little marketing action for the 2008 crop have benefited greatly.

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