2016 Byrne AG Marketing

Grain Marketing for 2016, already? I just finished harvesting my 2015 crop, most will say. What the heck is Byrne Investment talking about? Yes, for many this is truly the case, however, as they say, “The early bird gets the worm.” At this time of year, although supplies are peaking, post-harvest demand from soybean crushers (who will begin to operate toward capacity) and end soymeal users may result in post-harvest rallies, which grain hedgers may utilize to their benefit. Although post-harvest rallies for soybeans can be sharper in trajectory, and longer in time scale, corn may likewise present similar trading opportunities. Over the next several months we will hear about the South American soybean crop condition, the El Nino weather pattern possibly affecting the Southern Hemisphere, and how many degrees above Celsius the average ocean temperature may be. I’m a Fahrenheit guy myself, and zero degrees is my favorite temperature for ice fishing, but let’s not digress. If you have not yet spoken with Byrne Investment about your hedging plan moving into the New Year, now may be an ideal time to begin.

As a physical producer, the aim of an effective hedging plan is to attempt to obtain the highest possible average price for your crop, while simultaneously transferring the risk of adverse price movements onto another party. While there exists numerous instruments within the market to hedge with: futures, options, spreads, etc., short-dated options may offer a new opportunity within your marketing arsenal. Utilization of the premium received from short-dated option sales, coupled with the cash price received when the physical product is delivered, may offer hedgers increased flexibility within their grain marketing plan throughout the winter/early-spring window. This process does not hinge upon one correct, or incorrect, decision to “make or break” your marketing year. Furthermore, spacing out the option sales through multiple time and strike points may offer additional opportunities to adjust positions to changing market conditions as the upcoming crop year develops.

Let’s walk through a simple hypothetical example, because frankly simple works. This does not need to become brain surgery, or the reinvention of the wheel. (Please Note: Short-dated soybean options derive their price off of the November soybean 2016 futures contract.) As a farmer, let’s say that you would be content in receiving $9.60 a bushel for your upcoming 2016 soybean crop. Currently, November 2016 soybeans are trading at $9.00 per bushel on the futures market. The January 2016 short-dated $9.60 call options are trading at 10 cents or $500 each. Target to sell (5,000 bushels) one January $9.60 call option for 10 cents and go about your business as the market trades into expiration on 12/24/2015. Christmas Eve comes, and the futures market is still trading at roughly $9.00 per bushel. Those January $9.60 call options will expire worthless, and you keep the 10 cents profit because the futures market is trading below $9.60. At this point, you have secured 10 cents of hedge profit toward your 2016 marketing year, versus the farm which has taken no action yet for 2016. If you continue to utilize the same technique for the February, March, and April options, with the price received averaging approximately 10 cents each time you sold the next calendar month, you would net roughly 40 cents total in option hedge premium, as long as the futures remain below the strike price you sold. This simple option strategy may allow you to accrue monthly profits as you head into the 2016 growing year.

Now I can hear everyone saying, “Well Byrne Investments what if the market goes higher – perhaps up to $10.00 per bushel? I only received $9.60 per bushel and my neighbor’s farm was better off doing nothing at all.” This may not be the complete truth. Let’s take a deeper look. From the price point of $10.00 per bushel, the soybean market heading forward could progress in three general directions (higher, lower, or sideways), or any combination of those three. Your neighbor’s farm would have had to sell his entire crop at the $10.00 price point, on that day, and pick the market top - if that was indeed the high for the year. This would be a highly unlikely scenario, if he was not already working hedging orders to begin with. Additionally, I’m sure human nature would kick in, and a wait and see approach may be adopted, as prices have to go higher right? A higher price would actually be beneficial in our situation, as we would be averaging in a higher sales price point throughout the year - and that is our exact objective. If soybeans were trading at $10.00 per bushel upon expiration, we could then sell the $10.60 call, the following month, for ten cents - thus automatically averaging up our average hedge price. Rarely will we see a market climb continuously throughout the duration of an entire marketing year, as past year’s charts will demonstrate. Remember, at any point throughout the year, we can lock in our hedge price by selling short futures or buying put options. In the meantime, however, we may want to utilize a strategy which can place premium into our hedge account while we wait to secure more favorable price points. When selling the call options it is imperative that the strike price is favorable to your bottom line, regardless of where the market moves from that point forward.

Note: Using this method will require capital to meet the exchange margin requirements for the soybean contract throughout the marketing year. Also, one must deduct our clearing fees per trade which would equate to about 1 cent per option.
http://www.byrneinvest.com/margin-requirements.html

Bottom Line
Implementation of this marketing strategy, through the premium received by the sale of options, may help to increase the average price point received for your crop. The same technique outlined above can likewise be utilized for corn and wheat. We are not seeking to speculate by guessing on the next major weather pattern, or geopolitical event. Rather we are using the premium acquired through the sale of call options to fatten your marketing bottom line, while we wait to lock in a yearly hedge average. Furthermore, because the option sales are spaced throughout the year, we can continue to increase the strike price sold to adjust for any upward market movements. The producer retains the flexibility, at any point, to lock in a percentage of their crop at a price favorable to their bottom line.

Please feel free to contact us with any questions you may have, or to further discuss your individual marketing needs for the upcoming season. Our next marketing letter will be released in the spring as we finish up the planting of the 2016 summer row crops.

Thank you in advance,
Jim Byrne

Please call: 800-250-3450 or Email: jim@byrneinvest.com

 

 

 

 

This material has been prepared by a sales or trading employee or agent of Byrne Investment Services, Inc. and is, or is in the nature of, a solicitation. There is a significant risk of loss when trading futures and options contracts. Please read our full disclaimer.

 

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