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If You Choose to Reown Corn

An alternative strategy to finance futures is a call option.

As corn producers contemplate what to do with this year’s production, many will be in need of cash flow this winter and spring.

At current prices, there’s not much of an appetite to part with this year’s production. Yet, at some point, sales will be made. When they are, the questions become: Should I retain ownership? And if so, how?
 
Typically, corn futures trade in a seasonal pattern, with a tendency for prices to bottom in the late summer through fall. This year’s trend is very similar to many others in recent history. Prices peaked in July and appeared to bottom by end of August. Yet, increased yield projections and harvest pressure had futures sliding to new contract lows this past week. This pattern is not unexpected, particularly in big crop years. It is likely, however, that demand will strengthen in the months ahead and farmer selling will remain light. That sets the stage for price recovery. Uncertainty with South American production and the likelihood of a price recovery is strong. By February, the potential for a fight for acres between corn and soybeans could also be a factor. If you’re in a situation debating whether to pay commercial storage or needing to sell for cash flow, then we want to draw your attention to ways to sell and retain ownership on paper.
 
Buying futures will give you the best opportunity to capture a futures market increase. Yet, with futures there are risks, such as unlimited downside (prices drop) and the need for immediate cash flow to maintain minimum margin requirements in your account. Margin is set and required by the Chicago Board of Trade. So, while futures may be a good replacement of cash grain, one also has to be prepared to finance futures.
 
An alternative strategy is to purchase a call option. The purchase of a call option provides the owner the opportunity, or right, to be long futures, and not the obligation. In other words, you purchase the right at a fixed cost, which then becomes your risk. In essence, the worst or the greatest risk is at the time that you purchase the option. As prices recover and move higher, your call option may gain value. The amount of value gained depends on how steeply prices rally, and when they rally. Time value is an element to consider. When looking at today’s marketplace, with corn prices hovering near or at new contract lows, you may want to consider purchasing September $3.80, $3.90, or $4.00 calls.
 
When comparing the cost of options with (what we would term) generic commercial storage cost, calls are currently a good value. Most commercial storage charges we have encountered are in the area of 3¢ to 4¢ per bushel per month. Volatility is a pricing component of options, and the current low volatility environment is very low. Time value is reflected in the cost of the option, just as a monthly charge for storage.
 
Bottom line: By selling your grain and retaining ownership with September call options, you fix your risk and know your cost. Both are important in a year like this because this gives you a lot of time to stand in front of the market with a strategy that can appreciate in value, should prices rally.
 
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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.
 
Carol Tillmann Front Desk Administrative Assistant | Stewart-Peterson Office: 800.334.9779 | Fax: 262.334.6225 ctillmann@stewart-peterson.com
www.stewart-peterson.com
 
Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Hypothetical performance results have many inherent limitations. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. No representation is being made that scenario planning, strategy or discipline will guarantee success or profits. The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Reproduction of this information without prior written permission is prohibited. This material has been prepared by a sales or trading employee or agent of Stewart-Peterson and is, or is in the nature of, a solicitation. Any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to Stewart-Peterson. Stewart-Peterson refers to Stewart-Peterson Group Inc. and Stewart-Peterson Inc. Stewart-Peterson Group Inc. is registered with the Commodity Futures Trading Commission (CFTC) as an introducing broker and is a member of National Futures Association. Stewart-Peterson Inc. is a publishing company. A customer may have relationships with both companies. Accordingly this email is sent on behalf of the company or companies providing the services discussed in the email.

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