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Concentrate on Strategy, Analyst Says

If ever there was a time to concentrate on strategy, it is now. Why? Grain producers are faced with significant uncertainty over the growing season, as well as supply and demand numbers. There are more variables in mid-July than in recent history, and they all could affect prices. Just a few of those variables are planted acres, prevent-plant acres, African swine fever, and political uncertainty. Volatility remains alive and well.

Probably the two most important variables that will determine the size of this year's crop are acreage and yield. Both are highly uncertain. The USDA surprised the world on June 28 by announcing intended corn planted acres at 91.7 million. This was much larger than expected, and a smaller-than-expected decline from the 92.6 million noted on the March 31 report. Due to poor weather conditions, expectations are now indicating acreage could be 85 to 87 million, and yield closer to 160, vs. the current USDA estimate of 166. Uncertainty with U.S./China relations are another twist that could have an impact on prices in the weeks ahead. Will China be a buyer? If so, supplies could tighten quickly. What if they don’t buy?

In this environment of uncertainty, both bulls and bears may have good arguments for their biases. Trying to outguess how the market will perform is a challenging task to say the least. If you make the wrong marketing decisions, it could be catastrophic. It’s time to step back, take a deep breath, and relax. Forget trying to outguess the next USDA report, or if it will rain, or whether or not there will be an early frost. Instead, concentrate on strategy. Prices have rallied enough and supplies are ample enough. Choosing to not be a seller could possibly be a huge mistake. Consider other ways to sell or defend prices other than committing cash sales, which require delivery.

A simplistic and straightforward approach is to forward contract what you’re comfortable thinking you can produce. On bushels that you do not forward sell, purchase put options. The combination of the two provide 100% of expected production protected against lower prices. Purchase call options for the bushels you forward sell. If the futures price rallies, the call options may help to add to the bottom line, despite your forward sales, which cap upside price potential. You now own 100% of your expected production. You are balanced and prepared if prices move significantly higher or lower.

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If you have comments or questions, or need help implementing put option strategies, contact Top Farmer at 800-TOP-FARMER, extension 129, and ask for Bryan Doherty.

Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.

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