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Consider These Market Strategies in the Absence of a Weather Rally

In this perspective, we will address a defensive strategy for the corn market. With December corn futures hovering near 3.85 (give or take a dime), the market continues to march along, buying time and waiting for further news to suggest price direction. With a less-than-ideal spring in parts of the Midwest and cool temperatures in late April into early May, some may argue that the corn crop was not off to the best of starts. We agree. Yet, it is early enough in the season that good weather moving forward may make up for these conditions. As weather goes, so likely will corn prices. However, at near 3.85, there is not much excitement for producers to sell in advance, in particular forward contracts. Large old-crop inventories from a record 2016 crop suggests that it may take weather to move prices higher, yet record demand will support prices.
What if weather is not a factor? We should consider that scenario, considering it’s already mid-May. If wet areas dry out and planting picks up progress, there may not be much news to give prices a boost. So, what are your alternatives when looking to defend prices and leave some topside open, if not wide open?
Two strategies come to mind. Purchasing a put option can establish a price floor and leave upside potential for unpriced crop to gain value, should prices rally. In other words, you are buying an insurance policy against lower futures prices. As of this writing, December 3.80 corn puts are currently priced near 24¢. The question is whether or not you want to invest that amount of money to establish a price floor at basically 3.55. Only time will tell if that is a smart idea. Given that we have less acreage this year, the concept of a significant drop below 3.50, in accordance with record demand, may not seem all that likely. Therefore, in a tight financial year, perhaps this is not the best move to make. Another defensive strategy is to purchase the 3.80 December corn put and sell a December 4.50 corn call. The corn call is currently bringing just over 10¢, and this could reduce your out-of-pocket expense to 15¢ or less, or approximately cutting the cost of defensive posturing by 40%.
With the fence strategy, there are other variables you need to know. The short call option is a marginable position, which means you need to make margin calls, should prices move higher. In addition, the 4.50 call could become a hedge at 4.50, which means the owner of that call exercises this call. The owner becomes long the market, and you are assigned short futures at 3.80. In the end, you will have good recovering corn prices and a short hedge at a higher level. The put option, in this scenario, would likely lose all of its value if corn futures stayed above 4.50 at expiration in November. At present, we view this strategy as a win-win. You win by reducing the cost of your put and therefore increasing the price floor, or you have corn hedged at a much higher price. No matter your strategy, be prepared for the potential outcomes and funds that may be required to maintain positions.
If you have questions or comments on this strategy, don’t hesitate to call. This is an important time of year and you are busy with fieldwork, yet marketing may still have to be a high priority. Losing sight of this could be costly.
If you have questions or comments contact Top Farmer at 1-800-TOPFARM, ext. 129.
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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