News > CFE News Folder > What to do if we see another 5-10 cent increase?

What to do if we see another 5-10 cent increase?

May 14, 2019

Yesterday’s planting report below. Likely what sparked the majority of the rally today. It’s always rumored that ‘trade’ doesn’t start getting concerned about planting progress until May 15th.

If we see another 5-10 cent pop from here, I would really consider a minimum price contract for a portion of your old crop corn. Minimum price is the same as buying call options. You can buy a July or September call option. September options have more time value and therefore will be slightly more expensive. Overall, view this as a risk management strategy during the current weather market we are riding through.

Pros of Minimum Price:

1. 100% complete downside protection
2. Retaining financial upside with a call option
3. Capturing strong spot basis
4. 90% advance for cash flow

Cons of Minimum Price:

1. You pay 5-20 cents to buy the call
2. Your call option does not necessarily rally penny for penny with the futures
3. 5,000 bushel increments

Goal of Minimum Price:

You should hold one of these opinion’s in doing a minimum price contract.
  1. Aggressive-Aggressive – Buy a more expensive “In-the-Money” call. You feel like this spring weather could add an additional 20-30 cents or even more to the current corn futures, BUT you are worried if the forecast changes we could easily lose all of that. You are also worried basis will start to fall apart if the board rallies. Overall, you want to protect a futures drop of 25 cents and basis loss of 15 cents. Use minimum price in this case to lock in a floor of $3.45 while setting a sell targets of $3.70-$3.80.
  2. Conservative-Aggressive – Buy a less expensive “Out-of-the-Money” call. You want to protect your downside and you don’t have all that much hope in the market, but just-in-case the market decides to really rally (like 50+ cents) you would like to capture some of that upside. You pay 5-10 cents for protection, setting your floor @ $3.55. Your call will likely expire worthless unless the futures market rallies big, but you are protecting yourself from all the downside market risk in basis and futures.

Overall, this is for the producer who is most worried about the downside risk in the market who still wants to capture a good portion of a rally from here.

Remember, the most aggressive and most risky position is to do nothing. Are you willing to assume that risk, or would you like to lay some of it off?

Thanks & call to discuss!
CFE Grain Team
Matt Zeman: 712-330-5808
Wayne Kollis: 712-475-3368
Mike Rosenberg: 712-330-8014
Melissa Peters: 507-329-7881
PaigeThies: 712-475-3377
Austin Behrendsen: 712-720-7431


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