This is a sample entry from Craig Turner’s email newsletter, Turner’s Take, published on July 15, 2014.
I’ve been writing Turner’s Take since 2008 and in that time I’ve met and worked with a lot of farmers. I don’t write about hedging crops all the time, but when I notice something in the markets I like to put it out. For spec traders, talking about 2015-16 Corn (next year’s new crop is Dec 15 Corn), it might be a little too far out, but for hedgers this should be right in their wheel house.
I was talking with John Payne of This Week in Grain yesterday about 2015-16 acres and something quickly became apparent. If $3.75 corn brings us back to corn acreage levels of 10 years ago, we could see 2015-16 corn acres in the 80 million ranges again. Darrel Good of the University of Illinois had a great report the other day saying that the $2.00 corn of 2005-06 is the equivalent of $3.82 today. Click here to read How Burdensome Are Corn Supplies? The following year corn acres planted went from 81.8 to 78.3 million.
I think that if we stay at these price levels for much of the year, corn acres go down again to around 86 million planted. If trend line yields are around 165 then we still have plenty of corn and prices will be around $4.25 to $4.50 in my models. However, this is where it gets interesting. What if we have crop issues next year and the yield is only 155 on 86 million planted. In that case I can see the 2015-16 corn crop going to $6.25 based on my supply and demand models.
Turner’s Take Corn Supply & Demand Scenario for 86mm Acres & 155 Yield
So what does this mean for a corn farmer who wants to hedge (or a spec trader with a very long term outlook)? Consider this for farmers and revenue protection:
Most insurance and revenue protection products on the market today for farmers deal with minimum payouts and creating floors. The issue we saw a few years ago is what happens to the farmer whose crops are damaged or lost and they don’t have the cash grain to take advantage of summer weather rallies? It is great to have price protection from $4.00 on revenue insurance, but you miss out on the move to $6.00 if you don’t have the cash grain.
That is why we are looking at Dec 2015 Corn Call options. Dec 2015 Corn is trading at $4.19. A $5.00 call for Dec 2015 Corn is going for about 17 cents ($850). The $5.00/$6.00 Dec 15 corn call spread is about 10 cents ($500) for $1.00 in protection ($5000 per 5000 bushels). These options have 494 days until expiration.
If I was a farmer, and I wanted to have upside price protection in case my production is hurt in a year where acres and yields could potentially be much lower than they are this year, I would look at Dec 15 calls. The last time we went to $8.00 in corn, the biggest gripe I heard from farmers who had lost their crop was that revenue insurance only pays the bills. Farmers who lost their crops didn’t have anything in place to take advantage of $6.00, $7.00 and even $8.00 corn.
Hedge Idea #1: Buy the Dec 2015 Corn $5.00 Calls for 17 cents ($850 per 5000 bushels)
Hedge Idea #2: Buy the Dec 2015 Corn $5.00/$6.00 Call for 10 cents ($500 per 5000 bushels)
As for spec traders, I like this for traders who have an enormous amount of patience and have the funds where they hold a position for a year. For the hedger, this is a prudent business decision that protects them from losing yield in 2015-16 while being able to participate in higher prices if we have price rallies like we had a few years ago.
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