For grain that’s headed into bins in town, farmers have a clear edge in selling the cash bushel and using call options to retain ownership.
The cost of the call option as compared to the cost of storage drives the decision, said Jeremy Strubhar, senior broker at Advanced Trading. Speaking on this week’s episode of Ag Marketing IQ In Depth, Strubhar defined the dollars and cents involved.
Using numbers based on a central Illinois elevator, Strubhar pencils in these numbers: a 20-cent minimum storage charge through January, an extra shrink penalty that adds roughly 6 cents, and about 2.25 cents per month in interest opportunity. He figures storing corn until March 1 will cost about 43 cents.
Conversely, March corn futures sat near $5 on Tuesday, and a $5 March call was around 21 cents — roughly half the storage tab.
Here’s what could happen:
- The market goes up. You bought a call. “We’re going to gain in the call” with far less money at risk.
- The market goes down. You didn’t buy a call. “I paid storage, and I’m out the expense of all those costs, plus I lose equity in the bushel.” In this example, those costs are 43 cents.
- The market goes down. You bought a call. “The max I can lose is what I paid.” In this example, that’s 21 cents.
He pointed to 2019, when he advised clients to sell and buy calls ahead of a solid-looking spring. “In spring of 2020, COVID hit,” he said. “The price of corn dropped 75 cents. Every call I bought expired worthless, but I lost 20 cents on average compared to a guy who owned his corn and lost on the expense to own it plus 75 cents equity.”
Strubhar sees too many variables to bet on market direction: Brazil’s runoff election, global conflict and yield surprises, to name a few. But farmers use calls to position for a move either way. “I want to be in this market to participate if this market is to go higher,” he said.
The approach also shores up the lending conversation. “Your banker should love it because they can define your worst-case scenario, and they know you can repay the loan,” Strubhar said. “You can sleep at night. A bearish report comes out and you say, ‘At least I know what my floor is.’”
To hear the full conversation, watch this week’s episode of Ag Marketing IQ In Depth.