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Is There an Opportunity to Buy Calls for Corn?
July corn futures have dropped 14¢ since a December peak two weeks ago, and trading near $3.88 as of this writing. Though 14¢ is not a large move, the recent range of prices for July futures is a low of $3.82 to a high of $4.01. At $3.88, prices are closer to the low than the high. A price dip of over 50% of the recent range should be viewed as a long-term opportunity to purchase call options. These options can be used to either retain ownership of old-crop sales or cover upcoming sales of new crop.
Retaining ownership of old-crop corn is somewhat simple. You sold it already and are now looking for an opportunity to add value, should prices move higher. Consider buying longer-term options, that is, September or December. When purchasing a call, your risk is fixed and you have the right (not the obligation) to own futures. Expectations are that corn acres will be up. However, with world demand at a record pace and exports continuing to move along in a fast fashion not seen in years, it will take another big corn crop in 2019 just to meet world demand. Our long-term belief is that corn prices are a good value to end users, and on a springboard where a less-than-ideal growing season could cause prices to soar.
Buying calls for the purpose of covering new-crop sales involves a bit different reasoning. In this case, you are buying calls to give you the confidence to sell rallies on upcoming forward sales. Expectations of increased corn acres suggests producers should be looking to sell when prices rally. Cash is king, and the need to establish solid cash sales has to occur when pricing opportunities are presented. In recent years, when those opportunities came, they often disappeared even faster. Establishing predetermined sale targets worked well. Yet, farmers (who are just like anyone else) can get emotional. When prices rally, it seems there is every reason to continue higher, and having the discipline to sell can be challenging. By having calls in place, there should be no reason to cancel sell orders you placed at designated sell points. Remember, these preplanned orders were done when emotion was not a factor.
There is another reason to consider purchasing calls. You may be the farmer who is not emotional, is disciplined to sell price rallies, and make sales appropriately. When weather becomes a factor and sends prices higher, will emotion now be a factor? Call options that would be effective for you are now more expensive. You may end up spending more, or buying a higher strike price that provides less protection. Our advice is to buy them when premiums and volatility are low, like the environment that exists today.
Visit with your adviser to explore the risks and rewards of incorporating call options in your overall marketing strategy.
If you have questions or comments, contact Top Farmer at 1-800-334-9779, 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.