Manage Capital With Options, Not Market Guesses
As 2017 approaches, it's time to prepare. Yes, there is plenty of time to get ready to plant your crop. Now it's time to prepare marketing strategies for 2017. Markets often make big moves when least expected, and opportunities (as evident the last two years) come quickly, and can go even more quickly.
The key for 2017 will be a balanced approach. As prices recover (and we believe they will), there will be more reason to believe they should continue to move higher. This may be a time to turn bullish in outlook, yet not a time to abandon a well thought-out, prepared strategy.
Purchasing call options now could mean you will have them in place during a window when (suggested by historical data) prices have the highest probability to move higher. For corn, history suggests that December futures could reach between $4.15 and $4.35. A move above $4.50 would fall into a category of less than 50% chance of occurring.
When purchasing calls, you risk losing the premium paid. If weather becomes a factor, especially if acreage decreases and yields decline, it won't take long for the market to move substantially higher.
In this environment, investment money will likely flow into commodities, aiding further upside price potential. This could send corn futures well above the recent year’s highs and possibly back into the $5.00 or even $6.00 range. The purchased calls will gain in value, helping to add value to corn already forward sold.
The same can be said for soybeans. Expect November bean futures to likely trade between $10.00 and $11.00. This is where sales should be populated. Again, it’s important to purchase call options early in the season so that, when prices hit predetermined levels, you are selling without question.
We believe it is easier to manage the capital in an option than it is to try and outguess prices, especially with the bulk of your crop, and if you’re not selling at intended areas (good intentions are often abandoned). Selling becomes more difficult (for many) as prices rally and headlines begin to suggest all the reasons prices could continue to rally. It is important to remain disciplined.
The bottom line may simply be to assume prices will move in a seasonal pattern (lower in fall and higher in late winter/early spring). Also, be prepared for the unexpected. Another way to term this is a balanced approach. Make sure that you are balanced (whichever way the market goes) with the majority of the crop sold in a downtrend and majority owned in an uptrend. 2017 will offer new opportunities, and now is the time to plan for them. Being strategic could be the one variable that will separate good farmers from great farmers.
If you have questions or comments, or would like help in creating a balanced strategy for your operation, contact Bryan at Top Farmer Intelligence (800-TOP-FARM, ext. 129).
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