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Here’s a Grain Marketing Strategy to Protect the ‘Carry’
The corn futures market is currently trading with a carry, which implies the market is encouraging producers to store rather than sell.
As an example, if nearby September corn is trading at $3.54 and July 2019 at $3.92, this 38¢ differential, in theory, represents costs of holding corn in storage (or close to the cost).
In other words, the market is willing to pay $3.92 for corn before delivery in the month of July. The only problem is that, as any producer knows, there is no promise that carry will stay in the market. If it disappears, it usually means that futures are trading in a sideways trend. When that happens, as the front month expires, the following months will likely begin to move downward.
How can you protect carry?
Perhaps the simplest way is to forward sell. This commits a delivery. When forward selling out to a distant month, basis levels are usually wider. Consequently, this alternative may not look as attractive.
Another method would be to hedge, that is, to sell on the July 2019 futures contract. If corn prices remain relatively rangebound, it isn’t likely that your hedge will pick up ground as July futures eventually weaken. Basis may or may not narrow (move in the favor of a producer).
Generally, if futures are trending downward, the incentive for farmers to aggressively sell cash is diminished, and basis usually holds or improves.
Another method is to purchase a put. If, for example you purchase a July $3.90 corn put for 22¢, this would establish a futures floor at $3.90 and leave your unpriced grain available for a price rally. The put does not lock in a basis.
To take this strategy one step further, you could challenge the futures market to move higher. Again, for example purposes, if you sold one or possibly two July $4.40 calls for 11¢ each, you collect the premium. Consequently, if July corn futures are below $4.40 at expiration on June 24, these expire without value and in your favor. By selling two calls and collecting premium, this may offset most (if not all) of the costs of the purchased put.
Selling call options is a marginable position. While this can create a cash flow environment to meet margin call, this can only occur if prices are rallying, and your unpriced corn is gaining value. Bear in mind, however, that if selling two calls, these could eventually turn into short futures or hedges at $4.40. You will want to make sure you have this amount of corn in storage.
These strategies are outlined to try and protect carry. As with any strategy, make sure you have clear transparency on the function of the strategy, the risk, and potential benefits. Bottom line, understand what you are doing and why. This helps to alleviate emotion and solidify a strategy that makes sense for you and your farm operation.
If you have questions or comments, contact Top Farmer at 1-800-TOP-FARM, ext. 129, or 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.