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Crisis management

Agriculture.com Staff 03/14/2008 @ 12:04pm

The farm economy has turned from optimism to extreme uncertainty in a short period of time.

Farmers seem to be like deer caught in the headlights, in trying to make decisions. Until about two weeks ago, being paralyzed in making marketing decisions was a profitable condition. Unfortunately, when carried to the extreme, it may have led to liquidity problems because of grain not sold and turned into cash.

Those wanting to take advantage of very good prices for new crop grains have seen their tools being taken away. Fear of margin calls from being short in a runaway bull market limits the use of futures. Options are a logical choice but premiums are expensive. Even worse, liquidity of in-the-money options in deferred months is so bad farmers may not be able to cash in when they want to. Some elevators have stopped offering cash forward contracts except in old crop months.

The fear of grain buyers being in bad financial condition leaves farmers wondering how to keep the good times from turning bad. I offer the following ideas:

  1. Sell old crop grain that you have in storage. No matter how bullish you are, there is big risk in holding unpriced grain when corn is over $5 and soybeans are $12.
  2. If you are worried about the solvency of your buyer, divide your crop into increments. Deliver the first increment, collect and be sure the check clears the bank before selling the next increment. This will not guarantee payment, but will limit the losses in the event the elevator has financial problems.
  3. Use futures in very small amounts. Even very small farmers can use mini contracts of 1,000 bushels.
  4. Buy out-of-the money put options. At -the-money puts cost roughly $1.60 for November soybeans or $.73 for December corn. Drop to a strike $2.00 out-of-the money for soybean puts or $1.00 out-of-the money corn puts and you can still lock in a price higher than at any time in recent history for harvest time delivery.
  5. You don't necessarily need to forward price even with prices as good as they are. The fundamentals of bio fuel demand and the weakness of the dollar form a very solid floor under grain prices for the foreseeable future. Prices could go down but the chances are slim of seeing corn under $3 or soybeans under $8. I know farmers who will not sell anything until it is in their hands. They do all right if they are disciplined in following historic price patterns every year. Prices could drop 20% and still be high compared to most recent years.
  6. Use the crop insurance with harvest price option. Premiums are high, but much lower than covering the same bushels with options. Insurance does not guarantee a price but does guarantee gross income per acre. Evaluate carefully the cost of each increment of coverage. At some of the higher levels the cost is more than the coverage. Know what you are getting and what you are paying for it. In most locations, the decision must be made by Monday, March 17.

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