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Another way

Agriculture.com Staff 02/23/2007 @ 11:15am

A poster on the marketing talk page on February 14 made the statement "About the only way a person wouldn't be guaranteed a profitable year is to die, or not buy crop insurance."

There is another way-not sell anything. Crop insurance will only pay if harvest values are below a certain level, either because of poor yields or low prices. Then the payment is only a percentage of the maximum potential value of the crop.

This being the case, the only way to have a really good year is to sell while the prices are high. Once harvest is over and the base period for harvest price is past, crop insurance ends. At that point, you have no more price protection unless you have sold the grain.

I find the attitude that having a high level of crop insurance suffices as a marketing plan troubling. You are going to pay dearly for crop insurance coverage this year. Failing to utilize it to cover sales while it is in effect reduces the advantage of buying it in the first place.

The problem is in knowing when to pull the trigger on pricing. So far, procrastination has paid off big time! When the price makes all time highs day after day, making sales is like standing on the track in front of an approaching train. I suffer from the fear of making the decision as much as anyone.

That is why I prefer put options as a pricing tool. With options you can choose price levels that fit your bias. If you think prices are sure to go higher, you can buy an out-of-the-money $3.80 put on December corn for 19 cents and have about $1000 per contract committed. If you are less bullish and want more downside protection, a $4.30 slightly in-the-money put is 46 cents. That is pricy, but a better buy if prices drop.

If you are comfortable with options and understand the risk, you can buy a 4.00 put for 29 cents and sell a $5.20 call for 20 cents. This reduces the cost to nine cents plus commissions but restricts the top you might possible get to $5.20. Who among us would not be satisfied with $5.20 for our first sale on new crop corn? Crop revenue coverage or RA/HPO would cover the financial and production risk in the event that prices continue to rise. CRC has a cap of $1.50, but RA has no limit.

I want to get some corn priced before the March 31 report becomes a factor. Because of the huge unknowns with prices at these levels, put options have many advantages. Even with put options, at some point I will still have to make a decision when to sell the corn, but at least I will be protected from the risk of prices dropping dramatically until late November. All I have to do is decide which of the above strategies to use.

A poster on the marketing talk page on February 14 made the statement "About the only way a person wouldn't be guaranteed a profitable year is to die, or not buy crop insurance."

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