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Storing and Selling Grain: Consider Preharvest Alternatives NOW

At a marketing seminar this spring, a frustrated Iowa farmer raised
his hand. “I didn’t think we could have two big corn crops in a row,” he
said. “I already had cash corn to sell, and now I have new-crop corn I
need to get sold. What should I do?”

I told him I was also
surprised at the relentless bear market in corn again this spring and
summer. On top of his concern about the price of the cash corn he was
holding (some of which was in commercial storage), the big new-crop
meant he would need to sell ahead at least 50% of his new crop or put it
in commercial storage at harvest, too.

I asked him a lot of
questions and then explained several alternatives. One recommendation
was easy. I told him to sell the cash corn he was holding in commercial
storage and to replace with call options. He had a good basis. My
concern was that if corn futures rallied, then the cash basis would
deteriorate. Holding cash corn was a lose-lose proposition. If some
weather-related problem developed and futures rallied, then it was
cheaper – and less risky – to hold call options than to continue paying
interest at the bank and paying storage charges to the elevator.

The
second part of his question, about that new-crop corn, was a lot
tougher. It was hard for me to recommend that he sell his crop ahead
when the new-crop price was below his cost of production (and below the
crop insurance guarantee) even if it looked like prices were still
heading lower.

It is frustrating to watch December 2015 corn
futures go under $3.70. However, if you are a Corn Belt farmer who has
crop insurance and you are enrolled in the ARC-CO program, you do not
have a lot of additional financial risk. The lower the new-crop corn
prices go, the higher your likely crop insurance payment will be. Your
potential farm program payment increases at the same time.

DecemberCorn2015_080415.jpg

What to do
Consider these three alternatives prior to corn harvest.
1. Puts.
Buy some at-the-money put options. Corn prices are likely to keep
moving lower into harvest; the puts will protect you against lower
prices.
If you have crop insurance, then only do this on 10% to 30%
of your 2015 crop. Consider taking the gain or just stepping aside on
the positions in late September.
2. Synthetic Puts. Sell some
of the corn ahead in the cash market and buy some March 2016 corn
calls. In the industry, this is called a synthetic put. 
  
If the
market moves lower into fall, then you can deliver the corn at the
higher price. If the corn market eventually moves higher, you will be
underwater on your contracts, but your calls will make money.  Do this
for 10% to 30% of your 2015 corn crop.
3. Spreads.
At
harvest, sell the cash corn and buy July 2016 corn calls or bull call
spreads. This bull call strategy costs less than paying the shrink on
corn and the other elevator costs you incur when you put your corn into
commercial storage. Your total elevator costs (drying, shrink, plus
storage) can easily add up to 25¢. Instead, use that 25¢ to buy calls or
call spreads. It is a more complex strategy, but it is one that works.

What about beans?
The
frustrated Iowa farmer mentioned previously did not ask about soybeans.
However, the same concepts should be applied to the soybean market. If
you have limited storage, then you want to haul all of your soybeans in
and replace those sales with call options. Storing corn at home and
hauling the soybeans to town at harvest are usually the right financial
and marketing decisions.

Next page: Key price levels to watch

Key price levels to watch
The
December corn chart (shown on p. 24) shows the $4.15 crop insurance
guarantee, the approximate levels where you will receive ARC-CO
payments, and where PLC payments may begin. I am watching the double
bottom in December corn at $3.64 and the harvest of 2014 low at $3.18 on
my long-term monthly corn continuation chart as a possible low in the
fall of 2015. If that low is taken out, then corn could drop down to
long-term support at $2.90.

For November soybeans, the chart
(above) shows the $9.73 crop insurance guarantee, the approximate levels
where you will receive ARC-CO payments, and where PLC payments may
begin. I am watching the life-of-contract low at $8.96 (at the time of
this writing) and the April high at $9.78. If the November soybean
contract closes below $8.96, then the next long-term support is at
$8.50. 

NovemberBeans2015_080415.jpg

Key time periods to monitor
Watch
the last week of September for a possible major low. This is the
anniversary of when prices bottomed in 2014. If that scenario does not
work and if prices move lower through October, then the ideal time
period for a major low moves to late December 2015.

Looking ahead
to next year, begin putting your 2016 plan together now. In years with
large crops, the new-crop pricing opportunity usually occurs early in
the year. For your 2016 crop, you need to consider some hedges during
the week of November 27, 2015, the week of January 22, 2016, and the
week of March 18, 2016. The week of March 18, 2016, is also a key time
to consider some new-crop puts. 

If you learn to consistently get
some of your crops priced ahead using this type of plan, the odds are
very high that you will be better off than hoping for a summer rally or
being forced to sell at harvest.

To avoid having the same
marketing problems again next year, be more proactive by making your
new-crop 2016 marketing plan early.

Two opportunities
There are two opportunities where lower prices could add to your bottom line.

Opportunity #1: The
way the farm program and crop insurance works, the ideal situation
would be to have prices crash during October and then rally back by the
spring of 2016. If nearby corn futures drop to $2.90 in October 2015 and
rally back to $3.90 by July 2016, then you will make more money than if
corn rallied to $4 this fall.

It pencils out because you
could end up with a large crop insurance claim and you could also
maximize your farm program payment. This is especially true if you have
20% to 40% of your crop forward-sold.

Opportunity #2: Take
advantage of the large carrying charge that is developing in the corn
market. For those of you who have some hedges on and corn in storage,
you should be able to roll your hedges ahead from December 2015 to July
2016 for 26¢ to 28¢. That carry plus basis improvement of 20¢ to 30¢
could make your farm an additional 48¢ to 60¢ per bushel.

That is a lot of additional income for your farm when prices are this low.

NOTE: Trading of futures and 
options has substantial financial risk of loss and is not for 
all investors.

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