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Veteran Advisor

Cashing in hedges

Have you closed out hedges that you put on earlier this year? I think it would be an interesting discussion on how folks are or plan to close out hedges, for those who did them.  When do you buy back the futures or sell the puts.  It seems, that time is approaching in the next few weeks or months.

When is the best time to cash in the hedges? I'd love to hear some thoughts, if you are willing to share.

 

Thanks,

 

Mike

 

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12 Replies
Senior Contributor

Re: Cashing in hedges

Good question! It will be interesting to see the responses.

 

Planning on lifting bean hedges around Oct 10th.  And corn hedges around November 7th. Right or wrong thats my plan.

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Veteran Advisor

Re: Cashing in hedges

Silverwheaton,

 

I spoke with a representative of The Hightower Report, on Monday. We talked a lot about the possibilities of the soybean market to continue to drop, while the corn market could be seeing a low, soon. I have compiled his thoughts:

 

"The fundamentals for soybeans are really bearish.
When you look at the 2015 Ending Stocks, we have corn at 1.7 billion bushels and soybeans at 715 million bushels.
Meanwhile, in Brazil, the USDA has their soybean production at 91 million tons, with even higher private estimates.
The world and the U.S. are staring at all-time high record soybean stocks, unless something happens with the weather.
In the case of corn, you don't have that stock build scenario. Corn is a mess this year because you don't have China's business. And, nobody has ever seen yields like are being reported in the U.S. South. The yield numbers keep coming in shockingly high and the frost threat, before the Thursday Report is less likely. So, people are selling.
For corn, if you go back to a regular bean-to-corn ratio, a price of $3.50 into harvest, soybeans should be valued at $9.10 a bushel. So, the beans have about $1.00 of air in them. Corn looks fairly priced.
In a long, long shot scenario, corn could see a low of $3.08 1/2. I don't know if we get there, but it is based on a Dec. corn chart gap from July 7.
Things get worse: If corn is valued at $3.10, into harvest, soybeans would be fairly valued at $8.40 or something.
A lot of agronomists are shocked at the early harvest results and field checks in the U.S. South.
If the weather warms up, that would fill this corn out. With no frost, you have a shot of 174 bu./acre yield average. Furthermore, the soybeans will be yielding bigger, building bigger ending stocks figure.
We don't buy the multi-year problems for the corn market, like the soybean market.
Bottomline, the corn market needs the Chinese demand back. When China is done restricting trade, it's cheap enough for them to come back and buy a lot.
The soybean market is in a tricky situation, for now."

 

Mike

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Frequent Contributor

Re: Cashing in hedges

Well Mike my plan is to ride it all the way to the bottom and then cash in my hedges, then ride it back up before I sell the corn.

If only I was smart enough to know when we hit the bottom. When harvest is about two thirds done maybe? I guess we will know more when the combines roll how big this crop is.

 

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Frequent Contributor

Re: Cashing in hedges

    i have dec corn puts that will expire in mid november . i bought them for  30 cents and they are now 92 cents.To make the true put hedge work i should not exit my contract untill i have the corn harvested and then i would sell the corn and same time exit the put to capture the 62 cents if i would have done it today. This way i would gain 62 cents on top of my cash sale. When cash corn drops in price the put will gain approx. the same value, when you are deep in the money like this is now. I m  told this is a true hedge but everyone calls it something different.  if you sold the corn for a say fall price and then did not exit the put, the fall price could possibly go up and your put would loose value, this is why you have to work with your broker when you make the cash sale or it could not work as well. hope this makes sense,

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Esteemed Advisor

Re: Cashing in hedges

I like Silver's dates every year. This year both markets could easily be under pressure into first notice day, so I would implement the exit triggers after Silver's dates to exit. If we study some history for corn, just after Thanksgiving, just like 2005, could be the end of slide. Wheat overran 3 weeks to the normal downside timing, so it is certainly possible, if not probable, that c and s will as well. Plus, virtually no way harvest will be on time. Very likely it is 2 weeks later than normal, which could add to the time lag. And, since we have the rail issues killing basis in the north, all we need as a big flood in the south somewhere to mess up the barges, and whamo...the perfect storm.

 

The comments about high yields in the south are pretty overdone however. Of course, the south has high yields in a cold summer. More Mr. Obvious. The lower yields and low quality come in the north. And, because there really aren't many corn acres in the south, these numbers are probably not very indicative of a national yield number. Besides, yield numbers in KY are pretty miserable will help offset it a little. Beans shut down when it goes below 40 degrees and take 2 weeks to get going again. This weeks cold probably assures a national bean yield will be less than the fear come the Jan report. jmo

 

Back to your point however, once a hedge is lifted, it would be wise to sell the carry pretty quickly. The fall low is not likely to hold in either corn or soy, it didn't in wheat for good reasons. Those same reasons exist even moreso in corn and soy. again, jmo

 

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Senior Advisor

Re: Cashing in hedges

Probably like everyone else, I have some ideas in mind but they get squishy in execution.  I'm short corn and soybeans on the board and have both corn and soybean puts.

The October date mentioned for soybeans is about what I had in mind.  Roy Smith supports this time frame, I believe, and I respect Roy's soybean marketing ideas even if I don't always execute every one.

I will probably put in an exit price order for the beans in early October so that when the price comes up to it the order is executed.  I will not be sitting on the ticker trying to pick a sell point..  With a river market locally, I'll look to sell cash soybeans on the dead cat bounce and river close markets.  I don't know yet if I'll keep any soybeans into 2015 because if we have a big crop and South America does any good, next summer could be the obverse of this year on soybean prices.  I'll be out of most beans by the middle of December, I suspect.

For corn, I'm not as certain.  My personal guess is we'll see price pressure into harvest and then there will be some searching around for news.  If the crop is big enough to store in the streets, that might push prices down even more, at least basis could go south.

I'll do the same with corn as far as giving my broker some target prices and conceivably, though not likely, target dates.  I will look into selling the carry on corn.

I can store everything I'm likely to grow.  My crop will not be my biggest ever but it yield checks to be better than normal.

My guess is I will want to defer income into next year.  That probably won't affect too much of my hedging exit strategy but it is something I'll review with my CPS before selling.

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Honored Advisor

Re: Cashing in hedges

So.......they have 2015 soybean ending stocks at 715 million bushels?   That's quite a prediction.   Are they figuring that the world is gonna stop using soybeans?

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Veteran Advisor

Re: Cashing in hedges

It looks like some analysts and economists believe farmers should hold onto their hedges for awhile. Tony Dreibus, freelancer for Agriculture.com, sheds some light on whether to lift hedges or not, in this full story.

 

Farmers Urged To Wait To Lift Hedges.

 

 

What do you think?

 

Mike

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Senior Advisor

Re: Cashing in hedges

I don't agree with paying for a call option in preference to lifting a short hedge.  If you think you are going to have a little rally and then go down again, just wait it out.  If you think the rally is big enough to justify a call, buy the board back and either reverse or take another position when the time is right.  Brokers telling me to buy calls raises my skeptic level.

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