Carl German, Extension Crops Marketing Specialist; clgerman@udel.edu
Making Grain Sales in a Weather Market
It is becoming more apparent as time passes that 2008 U.S. row crop production will be adversely impacted by the weather and related problems stemming from crop diseases and insects this growing season. The extent of that impact is not known at this point in time. Couple that with high energy prices and the looming energy crisis and it becomes a guessing game as to how high corn and soybean prices could go. Dec ’08 corn futures closed at $7.80; Nov ’08 soybean futures at $15.43; July ’08 SRW (soft red winter) wheat at $9.04; Dec ’08 SRW wheat at $9.45 per bushel; July ’08 crude oil at $137.35 per barrel; and the U.S. dollar index at 73.915 in yesterday’s trading.
USDA’s Actual Plantings Report is due out at the end of the month to be followed by the U.S. and World Supply and Demand reports to be released in early July. Both of those reports will be important in terms of getting a handle on potential ’08 U.S. production. Of equal importance, if not more so, commodity traders will be watching the actions of the U.S. Congress (House and Senate) in terms of dealing with the energy crisis at hand. Oil prices are impacting the prices of everything that we consume. Businesses are finding it extremely difficult to make ends meet and consumers are now feeling the pinch. A comprehensive energy policy is needed to help alleviate the problem. In the event that the U.S. Congress takes action that will increase the supply of energy, then oil futures prices will come down. That in turn is likely to have a negative impact on corn and soybean prices.
Marketing Strategy
One of the best tools (if not the best) for making grain and oilseed sales decisions in a weather market is the use of Agricultural Options on Futures, specifically, the put option. Options are also a proven sales method in extremely volatile markets. A recent case in point is to consider what happened to hedgers in the wheat market this past winter and early spring that were holding short positions in the futures market. Many farmers and commercial hedgers alike could not keep pace with margin calls that at times exceeded the hedge price. Individual farmers lost thousands of dollars. Commercial hedgers lost millions. Just think what would have happened if those positions had been taken in the options market instead? Those hedge sales could have turned a profit rather than a loss. Grain farmers have four primary reasons for considering the use of put options this summer: (1) local grain elevators have restricted the amount that they are willing to book with individual farmers via forward contracts; (2) the high risk of enormous margin calls makes hedging in futures a risky alternative; (3) put options offer an opportunity to establish minimum prices on that portion of the crop not covered by crop insurance; and (4) put options give grain and oilseed farmers the opportunity to make sales at high prices for a known cost up front while locking in a Minimum Sales Price, thereby providing downside price risk protection. Further, in the event of a production shortfall, delivery of the bushels contracted is not required. For further information regarding the use of put options see “How to Reduce Price Risk through Options”, an online PowerPoint presentation, or contact Carl L. German, Extension Crops Marketing Specialist.