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Vain hope!

Agriculture.com Staff 11/21/2008 @ 12:51pm

When I wrote my November 14 column, I was all excited about the key reversal action in the stock market futures the day before.

I mentioned that there was only one criterion missing to make it a classic reversal. My excitement proved to be unfounded yesterday, November 20, when prices broke through the multiple bottoms of the previous weeks and closed at new lows. Any trading system has a certain percentage of times when it gives a false signal. It appears that the key reversal last week was one of those misleading signals.

Again, grains followed the outside markets and had a really bad day yesterday. There is still a glimmer of hope that yesterday might have also been only a false signal that prices are headed lower. I have seen times when prices closed lower briefly after a key reversal, only to turn around and confirm the reversal signal long term. Such anticipation could also be vain hope!

Today is expiration day for December futures. I have to do something with my $5.40 put options on December futures. My strategy was to buy December 2008 futures and sell July 2009 futures at a carry of 42 cents. I had the order in for two weeks but it did not get filled. This morning, I pulled that order and made the trade at 38 cents. I am a little leery about selling July futures below $4.00. I am even more leery of getting out of a short position that is almost $2.00 in the money. This strategy gives me a net cash price on my corn of approximately $5.00 per bushel, if the basis stays where it is currently. Now that the crop is harvested I do not have to worry about production risk. Margin calls are not such a concern with the grain in the bin.

This experience illustrates the advantage of using options for price protection. December futures went up over $2.00 after I bought the options. At one point the puts were worth only a few cents. When I exercise them they will return almost $2.00 for a $.48 premium. I doubt that I would have put in $2.00 of margin money to stay with a futures hedge. I kick myself for not buying more when the price was so cheap. I wish the strategy had not worked so well! The only way a big premium for put options pays off is if the prices drop a lot. In this case what I thought was a worst case scenario ended up being reality.

I finished harvest this week. I had a small field on the river bottom that had been partially flooded in June. As a result, we could not get the post emerge herbicide on. Besides the flooded out spots, there were weed issues. The small field and weed problems caused me to leave harvesting that field until everything else was done. When the combine left, I had 110 bushels per acre on that place.

Considering the horrible growing conditions, I was happy with the result. In contrast to many locations, my corn was dry enough that moisture dockage was not a big issue. The concern now is whether storage will pay for those bushels not covered by the options and futures.

When I wrote my November 14 column, I was all excited about the key reversal action in the stock market futures the day before.

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