Special thanks to our guest contributor and Arkansas native Scott Stiles, an extension economist with the University of Arkansas Division of Agriculture. He provides assistance to agricultural producers in the areas of farm management, commodity marketing, and agriculture policy. For the past 15 years he has been a regular commentator and columnist on commodity markets for various radio and print media.
In a perfect world all of our corn and soybean production would have been hedged in mid-June this year at the market highs. Following the dramatic production increases in the August USDA supply/demand report, it seems unlikely those highs will be revisited anytime soon. The USDA wasted no time in August forecasting record yields and production for both corn and soybeans. The current supply fundamentals will keep any price recovery very limited.
Fortunately, the USDA also expects record corn and soybean demand in the 2016-17 marketing year. Soybean exports for 2016-17 are projected to be a record 1.95 billion bushels. Corn exports are pegged at 2.175 billion bushels—the highest since 2007. With the shortfall in Argentina’s soybean crop this year and Brazil’s corn crop, U.S. export demand will be strong at least through March 2017.
Another market driver to watch is La Nina. Current forecasts indicate the highest probability for La Nina to begin is in the November 2016 to January 2017 timeframe. In past years La Nina has generally caused drier than normal conditions in Argentina and southern Brazil.
Strong export demand and unfavorable weather could be catalysts for price strength in early 2017. One marketing strategy to allow growers to take advantage of spring price rallies would be purchasing call options. With corn and soybean futures well off their summer highs and price volatility subdued, call options are now less expensive.
For example, a May 2017 $3.50 corn call option costs 26 cents per bushel (on August 12.) A “long” or purchased call option will gain in value if futures prices increase above the $3.50 strike price and will then add value to the final crop price or help buy out any cash contracts that cannot be filled. A May 2017 call would expire on April 21, 2017. In other words, buying May calls during August gives the buyer about eight months to capture any price rallies that may result from poor South American weather. When dividing the 26 cent premium over an eight-month period, this strategy may be far less expensive on a monthly basis than storing cash grain.
The key advantage of buying call options after the crop is sold in the cash market is maintaining the ability to benefit from a futures rally. Profits can be taken on the call option at any time prior to expiration. The only disadvantage would be if futures prices did not rally more than the option premium—26 cents in our corn example. There are a number of post-harvest marketing strategies. Re-owning your crop with call options is one low risk approach to capturing futures rallies and improving your bottom line.
Arkansas native Scott Stiles is an extension economist with the University of Arkansas Division of Agriculture. He provides assistance to agricultural producers in the areas of farm management, commodity marketing, and agriculture policy. For the past 15 years he has been a regular commentator and columnist on commodity markets for various radio and print media.