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07-09-2012 06:52 AM
I have a friend that tells everyone after a market has crashed, about how the dumb farmers should have protected themselves by buying puts at the top. Here is my challenge, today, right now.
Tell me the strategy at which to do that in a rising market like we have now. At what levels do you buy puts, how much does it cost and how do you get the better prices if they come, again at what cost.
For example, what would your strategy have been up to now....would you argue that you knew prices would rise, and you did not purchase puts at $5 , $6, etc? What would the cost have been??
Now, with some saying we are headed to uncharted territory, maybe $9 corn, maybe $10 or more .....at what points do you buy puts and what cost again....? See where this is headed....what actually becomes your net price after subtracting all the money that is paid for put insurance>?
It will be easy once the market crashes to look back in your rear view mirror and say that the "dumb farmer" should have protected himself at $7, $8, $9, $10, $11, or $12 or whatever, but what is the strategy to get a good net without knowing what the top actually will be?
And if you are smart enough to know the top, why on earth would you buy a put and diminish your net price?
07-09-2012 07:40 AM
Buying puts doesn't commit you to deliver bu you may not have. By the time your crop is assured good prices can slip away.
Puts work best at a time like now when the market is at historically extremes. They are expensive. Some buy em early and keep "rolling them up . Haven't found that to be all that profiable.
07-09-2012 08:48 AM
I'm not sure why you're posting your inclination to purchase puts, unless you're looking for reassurance from some other sources that your actions make sense. I know I have a note sitting right in front of me to "buy Sept. $5.60 call options at $.34" that I wrote about 21/2 weeks ago. On the Thursday I wrote that note, I couldn't quite convince myself to pull the trigger, so I wrote myself a note to attempt to get me to make the move. Friday rolled in...the markets opened up with the call selling at about $.35...and rose a few pennies over that toward noon. About the close..the market moved back enough I could have probably put in the order and got it filled, but was busy and didn't see what was going on in time. I had enough money in my accounts to probably buy about 150,000 bushels of calls. I'm still kicking myself.
So I have a suggestion. If you are looking for reassurance, maybe I can offer a strategy that helps. If you have corn that looks like it's going to make something (yes I realize you're in Ohio..and my corn doesn't look all that spectacular either) or..you have good revenue coverage with the harvest price option, then why don't you sell a call. Let's see what that does. You're not locked into delivering anything like a contract locks you into. You still have the physical..in either your potential crop or the revenue from your insurance. You make a little money on the call...if the price of the commodity goes down like you feel it will. And if the commodity goes to the moon, you still can sell it for the price it goes to and then buy the option back. I may be simplifying things too much, and I welcome anyone's input on my strategy...but it sounds like something that would work.
07-09-2012 10:19 AM
I started buying Dec. 2012 corn puts back in March at the $5.00 level. I have slowly rolled them up to the $6.00 level since then. Doing this does get into your profit margin, but what it does is place a floor under the market price so you've got some bottom side protection. I prefer options over futures since they don't require margin money. I refer to it as an insurance policy on my marketing plan. This is about the extent of my knowledge. This is the first year I have done this, but I will say I spend many more nights sleeping now than worrying.
I also have been trying a call option spread on all my sold wheat bushels. I try to start with a $0.80 to $0.70 spread. The last two weeks I was able to buy and sell this spread twice and bank around $0.40/spread on each contract. When the markets retreated last Friday, I rolled the dice and rebought the exact spread I liquidated the day before. Looking at the markets this morning, it seems the gamble has paid off. I don't have on farm storage so these spreads allow me to sell grain near harvest time to pay bills and avoid storage fees while I am still alive in any price rally that may occur as harvest pressure winds down.
07-09-2012 10:20 AM
Red I totally agree with your assesment. It is a risk managment tool, a form of insurance. Problem is---------it is very expensive and the final cost is unpredictable. Resale of additional insurance is often necessary.
07-09-2012 01:40 PM
My four step program is...
1) plant it
2) grow it
3) harvest it
4) sell it
no where is there a margin for me to give any to a brokerage house or trader.
If step 1 or 2 develops a problem there is NO money down the rat hole to a trader of broker
if step 1 or 2 develops a problem I just cash the crop insurance ck and tighten my belt and try again next year. I know for sure there is no room in that crop insurance check for a trader of broker.