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Keep it simple

Agriculture.com Staff 02/02/2007 @ 3:24pm

Both bullish and bearish traders have valid reasons why corn prices may move up or down over the next nine months. Both may be correct. Be prepared with the use of strategic planning. One simplistic strategy is establishing a price floor on all of your expected production by forward contracting and purchasing puts. Also, purchase call options to protect what you forward contracted. You want to be positioned if the market makes a significant move up or down.

The corn market has generally provided selling opportunities in the March-April-May window. This year, prices have experienced a much stronger start than expected and, therefore, prices provide value which suggests you may want to make sales now. If you are confident in your ability to grow corn (which you should be, otherwise you would not plant), then consider forward contracting or hedging half of your crop. Buy December corn puts against the other 50%. This provides a price floor on 100% of expected production.

On the 50% that is not forward sold, you have unlimited profit potential if prices rally, especially if weather becomes a factor. On the 50% you have forward sold, you are capped. Therefore, to participate in a rally on the forward sold corn, buy call options in December. While not cheap, they provide a significant potential for you to benefit from a bull market should prices rally further. You may find it more advantageous to buy out-of-the-money calls in order to cheapen your cost yet have a safety valve if a significant rally occurs. While simplistic, this strategy can be an effective marketing strategy.

If you have any questions, comments, or want a formalized, simplistic strategy for your operation, contact Top Farmer at 1-800-TOP-FARM, ext. 129.

Both bullish and bearish traders have valid reasons why corn prices may move up or down over the next nine months. Both may be correct. Be prepared with the use of strategic planning. One simplistic strategy is establishing a price floor on all of your expected production by forward contracting and purchasing puts. Also, purchase call options to protect what you forward contracted. You want to be positioned if the market makes a significant move up or down.

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