For much of this marketing year news has been nothing but doom and gloom. We appeared to have adequate and even growing stocks both domestically and globally. This weighed substantially on the market as prices slipped to levels we had not seen in quite some time. Since those lows were established in mid-June, some things have changed. An overabundance of moisture has fallen in the eastern Corn Belt to the point that it has damaged production potential or even kept ground out of production.
As the marketplace has tried to digest all this information and what it will mean to overall production, it has built some risk premium into the market, or what I like to call opportunity. At the time this was written, new crop corn values have recovered roughly $.80 per bushel and soybeans $1.30. This type of move is substantial and, in my opinion, worth protecting.
I am in no way suggesting that the market is not or could not continue to work higher. There is still plenty of uncertainty that the market will have to navigate through. There are ways to protect this move while still allowing you to participate in upside movement if it were to continue.
A minimum price contract may just be the tool to consider. A minimum price contract is a tool that incorporates futures options to establish a floor while still allowing participation if the market were to move higher. There are two types of minimum price contracts. First, using a put option to establish a futures floor. The second would involve selling the grain and buying a call option that would appreciate if prices did continue to work higher. Generally speaking, a minimum price contract using a put option would involve a slightly lower floor with a higher level of participation to the upside while a minimum price contract using a call option would have a slightly higher floor with a lower level of participation of upside movement. Both styles are very effective in market conditions such as these.
There are a few intricacies involved using this style of risk management tool. A person can roll the option up or down as the market moves to raise your floor, or a person can use a short dated option which is generally less expensive. Feel free to contact your local Wheat Growers Grain Marketing Specialist to find out how these or other risk management tools can be incorporated into your marketing plan.