Posted by: usset001 | October 30, 2008

Corn marketing alternatives for a bumper crop

I received an interesting email this morning from a corn producer. He commented, “Just a quick note as many hours spent in the combine.  We are getting 200 bushel/acre yields of corn. We are running out of storage and all fall contracts are filled.  What do we do, thinking futures are going to move higher; store at elevator or deliver and fix basis?  The cash basis is 31 cents and increases going to next summer. We can also deliver and fix basis leaving futures not set, with no fee until November 25 and then 3 cents to roll.”

I suspect he is not the only corn producer facing this problem. Let me share with you my response…

I happen to agree with you about the futures market, but I have lost count of the times I’ve been wrong. Your alternatives are few. Let’s review them…

Should I store at the elevator? Commercial storage rates are high and take all the fun out of storage. I’m not keen on commercial storage. 

Should I deliver and fix the basis? There is nothing wrong with this alternative, and a strong basis demands that you price at least part of your crop in this manner. If you need upside potential, you can re-own with a call option. But options are very expensive. I suggest you keep the money and look ahead to next years crop, where you still have lots of upside potential.

Should I deliver and fix the basis, leaving futures open? Ahh, the infamous “delayed-price” contract. It is tempting but let me ask you one question: Are you sure about the rock-solid financial standing of your elevator? If the elevator fails, you will quickly learn that you gave up ownership on that grain, and you will be treated like any other unsecured lender.

Bottom line: A bigger than expected crop is a nice problem to have. If you are uncertain (like me) of the pricing or storage tool to use on the bumper part of your crop, diverisfy your choices. One big decision opens the door to one big mistake. Diversify!


Responses

  1. One thing we have been doing in our area has been a lot of min-max price contracts. Whereas the producer sells the corn, locks in basis and futures and basically buys the option; but to make the option a little cheaper he sells a higher call thus turning it into what we call a MIN-MAX contract. We have been doing many of these for nearby delivery with a strong basis from ethonal plants needing corn. The basis is so strong that is basically paying for the cost of the option play.

    The ones we have been doing have been off the July futures a little out of the money. Most spending 30-40 cents; for about 2.50-3.00 upside. Going out until July has some benefits as it covers the possible acre war (that is what most bulls use for why prices would climb) and also covers possible planting issues such as we had this year.

    The use of options in the past has typically been a waste of money; but the more volatile the markes become the more the use of options makes sense.

    I like the last statement of DIVERSIFY!

  2. you do realize that buying options is buying volatility. In more volatile markets you are going to pay more for the options. So if it didn’t make sense before options never make sense in more volatile markets just because they are volatile. Know what you are buying.

  3. I think options make perfect sense in a good marketing plan. You do need to know what you are buying and realize that the cost because of the volatility is high but that same reason is a reason to purchase options.


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