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How to Maintain Ownership of Your Corn Crop
We have recently fielded a number of questions from corn producers who want to maintain ownership of this year’s crop and may not have enough on-farm storage.
When weighing their alternatives, some have suggested they would rather not pay commercial storage costs; rather, reown sold bushels through the use of paper alternatives. This Perspective will explore two ownership strategies. One is purchasing futures and one is purchasing a call option.
We’ll start with futures. When you purchase futures, you will need a brokerage account. Contract size is 5,000 bushels. Buying futures is similar to owning corn in storage, in that it is subject to gains or losses as the market moves higher or lower. Contracts are traded at the Chicago Board of Trade. You simply replace corn in the bin with corn on paper. There are, however, some differences.
Futures positions require a margin, which is a down payment or good faith amount of money that the exchange requires. You must maintain this margin. Should your account fall below the maintenance requirement of this margin, you will receive a margin call, meaning that there’s an immediate cash flow need to keep your account current. You will also need to determine which contract month to purchase. Contracts are offered in five months: March, May, July, September, and December. Risk is unlimited, as is potential. You can exit your contract at any time before last trading day.
A second tool to retain ownership is a call option. Here too, you will need a brokerage account. A call option provides you the right, and not the obligation, to own corn futures. The beauty with a call option is that the risk is fixed, unlike futures. Calls are traded on the same contract months as futures. If selling corn, using a call to retain ownership provides you unlimited price appreciation potential, with risk fixed to premium plus commission. If you sell corn out of the field, consider buying a call at the same time you sell your inventory. Sometimes farmers wait, and this can be a problem if volatility (a pricing component) picks up and futures prices begin to move higher. Call options become more of an expense as prices move higher.
If you do plan to store, and know you want to sell cash corn on a rally, consider buying call options prior to selling. The ability to pull the trigger on cash sales can be an easier decision if ownership on paper is already in place. This may be, by some accounts, putting the cart in front of the horse. Yet, if prices move higher and you have trouble making the decision to sell, having a call in place that is gaining value may be just the tool needed to encourage the discipline to sell without question.
Which calls to buy? With bigger carryout, we suggest moving out to the September or even December 2018 contracts. It may take longer for prices to recover in a year where there is not an immediate expectation for supplies to tighten. You’ll pay more for time value, but you’ll also likely pay less cost per day than purchasing a March, May, or even July contract. Bottom line: You want to be positioned before a weather market occurs. Like futures, you can enter and exit any time prior to the last trading day.
If you have questions or comments on these 2 strategies, contact Bryan Doherty 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.