Inside the Market
The Gift of February
You may not realize it, but February is a great time of year for finding risk-management opportunities in corn and soybeans. What is so great about February, you ask?
This year is a little different, but for most, harvest is over, and it's too early for planting. Unless you have livestock, you might have time on your hands to visit a farm show or check out futures and options prices.
In a typical February, corn and soybean prices have rebounded from harvest lows, but often aren't high enough to inspire enthusiastic selling. February is also a time when we learn more about Brazil's next soybean crop. The threat of new competition is never far away.
LOW PRICE VOLATILITY
The big advantage this month has for risk planning is the low price volatility among crop prices. Thanks to low volatility, it is not uncommon to find put options on new-crop futures contracts of corn and soybeans offered at bargain prices.
Chalk it up to human nature, but U.S. corn and soybean markets typically show little concern for the risk of falling prices in February that could come from a season of good weather in 2020. A few cents a bushel spent on a new-crop corn put can often remove 80 to 85% of the price risk of owning corn up until mid-November, regardless of the yield you achieve.
I realize many people bristle at the idea of buying put options, either because it's an unfamiliar experience or because they're concerned they might be throwing money down the drain. However, if you want to learn how to reduce financial risk on the farm, one of the easiest things you can do is to learn more about how put options can work for you.
PUTS AS PROTECTION
At the 2019 DTN/Progressive Farmer Ag Summit in Chicago, a nice gentleman let me know that he took my advice the previous year and bought some November $7.60 soybean puts, priced at roughly 4 cents or less at the time. In December 2018, I had talked about the puts as a way of protecting against the risk of falling soybean prices while we were in a trade dispute with China.
I may have misunderstood, but he seemed a little disappointed the puts didn't pay off. Actually, it is a good thing when puts expire worthless.
Just as I wouldn't want your house to get hit by a tornado so your insurance policy pays off, I would rather see you make money on the cash side of the market than see November $7.60 soybean puts settle in the money.
The puts are for your farm's protection, and this is the time of year when good deals can often be found without paying too much. We can't make the world behave the way we want, but with careful planning, we can change the odds of the risks we face.
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