Harvest activity is nearing completion and farmers are faced with historically weak basis and corn values below their cost of production. Farmers across the Midwest are likely planning to store corn in either on farm storage or through their local elevator, crossing their fingers and hoping to achieve a profitable sales price at a later date. I am asking you to “Think Outside the Bin” and consider re-ownership. This will allow you to avoid storage shrink and paying hefty storage costs, while still setting a minimum price for your bushels and participating in potential future market gains.
Strategy 1: The most straightforward re-ownership strategy is to simply sell cash grain and simultaneously buy futures. This will allow you to generate cash flow, set a minimum price, remove basis risk, and provide unlimited upside potential. Re-ownership through futures will allows you, the producer, to benefit penny for penny in a rise in value. Risk is unlimited and it should be understood that a decline in value would create the immediate need for additional margin funds.
Strategy 2: If you are more risk adverse consider making a cash sale and purchasing a call option. Your overall risk is limited to a one-time premium cost, which will vary depending on amount of time purchased. The long call will allow you the ability to be long the market and maintain ownership of your previously sold bushels, while avoiding the risk for additional margin funds if values decline.
Strategy 3: If you believe the lows have been reached and are less risk adverse consider selling cash and transferring risk to the futures market through buying a call and selling an out-of-the-money put. The long call allows you the ability to participate in market gains, while the short put reduces the upfront cost. There is margin risk associated with the short put and additional funds would be required if values decline. You will benefit from this strategy if market value rises during a specific timeframe.
Grain PhD experts are currently working with producers on re-ownership strategies. If you are interested in learning about additional tools available to better market your grain production or would like to discuss the above strategies please visit www.GrainPhD.com and take advantage of our “Ask the Expert” tool. We can also be reached at email@example.com or 1-877-Grain01.
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