Maybe your primary marketing plan has always been to consider forward-pricing and delivery contracts that are offered by local elevators, even though you know it doesn’t always work out as well as you’d like.
Tyler Welygan-Reiling of Agra Risk Solutions suggests the following basic strategy that uses some of the marketing tools available in the futures market to boost the odds in your favour.
Early in the calendar year is a good time to look at developing a marketing plan for the new crop that hasn’t even been planted yet. But at that time, the producer may, for example, still have some unsold canola in the bin from the previous year’s crop, and Welygan-Reiling paints the following scenario.
“The binned canola that day in January is worth $9 per bushel, and the farmer could really use the cash flow right at that time, but they also suspect the market might increase over the next few months,” says Welygan-Reiling. “How can they handle that?”
Two of the simplest price protection tools are call and put options. A call option allows you to sell your crop today, and still take advantage of a rising price market. A put option provides protection against a falling price market.
In the case of the farmer with canola in the bin in January, Welygan-Reiling says the farmer can sell today, and also turn to the futures market to buy a call option that expires six months away in June, for example.
“The farmer has sold their binned crop today, but with the call option in place they can also take advantage of any price increases over the next six months,” says Welygan-Reiling. Buying the call option might cost 20 cents a bushel, but if canola prices increase, they will easily recover that premium cost. “If canola prices don’t increase between January and June, at least the farmer can take some comfort that they sold their binned crop at the best price,” he says.
To continue the scenario — the farmer buys the call option in January. Then, come April or May, they look at the market and canola has increased $1.20 per bushel. Now they want to cash in on that new price, so they sell the call option in May. They offer the call option at $1.20 per bushel, maybe getting a buyer at $1.20 or, depending on the market that day, they might be offered $1.10 per bushel, for example.
“Either way they have made money on that position while managing their cash-flow requirements, which puts them further ahead,” says Welygan-Reiling. “They sold their crop in the bin for $9, and now with the call option they have earned another $1 (after factoring the initial cost of the position) more per bushel.”
“If the market doesn’t increase, they can just let their call option expire,” says Welygan-Reiling. “They’ll be out that initial 20 cents per bushel to buy the call option, but at least they will know they got the best price available for their binned canola at the time.”
Depending on the commodity, the futures market can be used to lock in a price at least one year ahead and, in many cases, even longer. Some futures markets extend two, three or even five to 10 years ahead.
The call and put options can be used like insurance to protect yourself against either rising (call) or falling (put) markets.
The point, says Welygan-Reiling, is that using options really isn’t that complicated. And while it is true that options do involve a purchase cost, it really isn’t that difficult to weigh the potential benefits of the option against their purchase price.
“Marketing crop through a local elevator or a grain buyer has a place,” says Welygan-Reiling. “But if that’s all you use, it is like only using half your tools to build a house.”