Kub's Den

Here's a list of just a few of the things you can bet on this week ahead of the National Football League's 52nd Super Bowl:

-- Which team will win -- the New England Patriots (favored by 4 1/2 points) or the Philadelphia Eagles?

-- Will both teams together score more or less than 48 1/2 points?

-- Will the first scoring play of the game be a Philadelphia field goal (7-2 odds), a New England rushing touchdown (4-1 odds), or perhaps a New England safety (75-1 odds)?

-- Will Rex Burkhead be the first player to score a touchdown (22-1 odds)?

-- How many times will the temperature outside the stadium in Minneapolis be mentioned during the television broadcast (even odds for 'under 1')?

-- Will Justin Timberlake cover a Prince song during the halftime show (even odds for 'no')?

-- Will a corn and soybean farmer receive a profitable financial outcome for his 2018-harvested crops?

That last one, of course, isn't listed as part of the offshore betting companies' sports books; and it may still be available to "bet" on even after Sunday's game is over and all the wings are eaten and all the confetti is cleared away.

The American Gaming Association estimates that Americans will place $4.76 billion worth of wagers on this Super Bowl, with only about 3% of that business taking place legally in Nevada. People are so eager to risk the rest of those billions of dollars that they are willing to do so illegally, via offshore companies or local bookies.

I wonder how many of those bettors are farmers? Then among those farmers, I wonder how many don't have any prices locked in for 2018 grain yet?

Frequently, I will encounter farmers or other grain market participants who say things like, "Oh, that futures market stuff. It's just nothing but legalized gambling." Some of these people have been burned by large hedge losses in the past (or large speculative "bets" that went awry in their hedge accounts). And some of them simply recognize, accurately, that futures and options trading creates the potential for very large losses to accumulate very quickly. Those losses must be paid in cash, unlike the equally large but more easily ignored book value losses that can occur on unhedged grain.

Generally speaking, I agree with these people. Futures and options trading is a form of legalized gambling. Both activities are, by definition, undertaken with a risk of loss and a chance of profit. And there's nothing wrong with "gambling," if gambling reliably reimburses you for potential losses in your business.

Consider the case of a T-shirt vendor in Philadelphia, with let's say three pallets of T-shirts already printed up, reading: "Philadelphia Eagles, Super Bowl LII Champions!" That's about $9,000 worth of inventory, which he hopes to sell for $90,000 -- if, and only if, the Eagles actually win and actually can claim to be champions. Otherwise, those T-shirts are junk and those pallets will get shipped to the used/rummage clothing market in Africa. That T-shirt buyer could justifiably place a bet in Las Vegas to reimburse him for thousands of dollars of lost business if the Eagles end up losing (although I have no idea how the IRS would treat the potential "hedge" loss).

And that brings us back to the farmer and his present opportunity to lock in profitable prices for 2018 grain. Let's say this particular farmer has penciled out his anticipated costs of production in 2018, and his breakeven levels will be $3.44 per bushel of corn and $8.95 per bushel of soybeans. A look at this local elevator's new-crop bids shows an opportunity to sell corn at $3.53 (-40X basis bid) and to sell soybeans at $9.33 (-80X basis bid). Individual breakeven scenarios would occur at different numbers, but these are very realistic numbers today in central Iowa. Technically, that farmer has the opportunity today to lock in a profit for his 2018 production. Doing so could be considered a "gamble" -- he doesn't know for sure that he might not have opportunities to make greater profit in the future -- but it is also a chance of ultimately receiving a profit, in the historically probable scenario that grain prices will be lower by the time harvest occurs.

Sports bettors have a broad universe of alternative bets they can make, and so do farmers. A farmer looking to hedge some risk at today's slim profit margins could, among his many alternatives:

-- Sell futures contracts in a brokerage account (gaining cash penny-for-penny if the market moves lower).

-- Buy put options in a brokerage account (let's say spending 22 cents per bushel on December $3.90 put options and gaining about 44 cents for every $1 the market moves lower).

-- Sell call options in a brokerage account (let's say earning 10 cents per bushel for some December $4.50 call options and potentially being short in corn futures if the price ever moves above that level).

-- Never bother opening a brokerage account and simply lock in prices through a cash contract or hedge-to-arrive contract at the local elevator.

All of those are reasonable alternatives, in my opinion. At this time last year, when the grain markets were similarly faced with abundant inventories and no expected major threat to global production, the new-crop corn and soybean contracts were priced at eerily similar prices to where they are today (around $3.90 and $10.15). Recall that they ultimately went on to shed more than 10% of their value before the contracts expired. The real risk of loss -- the real gambling -- that's done in the grain markets occurs when the bushels are left unpriced.

Elaine Kub is the author of "Mastering the Grain Markets: How Profits Are Really Made."

She can be reached at elaine@masteringthegrainmarkets.com or on Twitter @elainekub

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