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Bryan Doherty: Helping pay storage

Agriculture.com Staff 08/28/2009 @ 11:50am

As harvest approaches, many of you are trying to get an accurate estimate of how much production you will have this year. Will this year's crop be plentiful or less than anticipated? All these questions will soon be answered. For most, once the bins are full, the extra is sold or moved to town and stored. What about that stored inventory? Obviously, there is a belief, or at least a hope, that prices will rally. Or, at least, basis will improve. Just about like anything in life, there is a cost associated with your choices. If storing grain, even at home, there is a cost. Are there any strategies that can help to reduce the cost of storage? We like the idea of selling call options.

When selling a call option, you are providing the buyer of that option the right to be long the futures market at the strike price you have sold. In other words, they pay you a premium. It is this premium that may interest those who have grain in storage. Let’s look at an example.

March corn futures are trading at $3.40, and a March $4.40 call is trading at $0.10. If you sell this option for $0.10, then you have provided the buyer of this option the right to own corn at $4.40. The buyer will use this option if, at expiration in February (options expire about one month prior to futures), March corn futures are $4.40 or higher. If futures stay below $4.40, then you will have collected all $0.10, less commission costs. If March futures are at, say, $4.80 at expiration, your option will be exercised, and you will be short futures at $4.40. You still collect the premium. In this case, you will be hedged at $4.50, less commission. With the futures market at $4.80, you will be behind on your position about $0.40. Keep in mind, the market had to move from $3.40 to $4.80. You will have received an increase of $1.40 in cash for your corn. In this case, we are assuming basis is constant.

The point is, this position is a win/win for a producer. You either collect $0.10, or you collect $0.10 and have the option exercised against you at $4.40. This means the futures market had to advance, creating an increased value of stored corn. The downside is that, potentially there is unlimited price rally against the short option, creating margin issues. Make sure you understand this strategy fully.

As the crop matures, now is the time to consider selling/writing options on about 25% of corn or beans that you will be storing. Challenge the market to move up to or through the sold strike prices.

If you have questions or comments, contact Bryan Doherty at Top Farmer, 1-800-TOP-FARM ext. 129.

As harvest approaches, many of you are trying to get an accurate estimate of how much production you will have this year. Will this year's crop be plentiful or less than anticipated? All these questions will soon be answered. For most, once the bins are full, the extra is sold or moved to town and stored. What about that stored inventory? Obviously, there is a belief, or at least a hope, that prices will rally. Or, at least, basis will improve. Just about like anything in life, there is a cost associated with your choices. If storing grain, even at home, there is a cost. Are there any strategies that can help to reduce the cost of storage? We like the idea of selling call options.

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