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Hay, Put Options, Rain Days Update 04/17/2022

Highlights


The March Soybean NOPA crush was 181.8 million bushels, about as expected and 3.8 million bushels more than a year ago. The soybean crush margin in March averaged $1.93 per bushel more than a year ago.

Dale Leslein: I run one of the largest hay auctions in the Midwest, prices have been very depressed, but 3 weeks ago the market took off. Buyers from all over and when I asked these people, many I have not seen in years, the majority say the same thing,

"We're gonna buy all our hay next year and plant corn and beans.”

For the last 22 years I have tracked the used equipment prices of the Brillion sure stand seeder and the John Deere 8300 and 450 grain drills and the Case IH 5100 and 5300 drills all of which are used for seeding alfalfa. When prices are high lots of alfalfa is seeded. Since August, prices have dropped by an average of 31% in an era of skyrocketing used equipment to see these prices dropping is quite alarming, Sure looks like to me hay acres are gonna get flipped into row crops. Also I was in the seed business for 26 years, got tired of it 5 years ago and quit, this past week, I got a call from a major seed co offering me 1200 bags of alfalfa seed for $95 that retails for $280. Farmers vote with their checkbooks and it sure looks like hay is not in their plans for 2022.

 

Brazil’s wheat seeded area is expected to be the largest in 36 years at 8.9 million acres (3.6 million hectares). That is 30% more than last year, according to SAFRAS & Mercado, the main agribusiness consultancy in Latin America.


Last week, we recommended buying September Soft Red Winter Wheat Put Options and most likely within the next two and half months, we will be recommending the purchase of December corn puts and November soybeans puts. We will present a series of educational explanations about put options. Even though most of you do not grow wheat and did not buy wheat options, you will be encouraged to buy corn and soybean puts. Now is the time to expand your understanding of marketing tools.


Why?


To make money; to add additional value to the HTA or cash price sales you have already made or will make.


Options are called “options” because the buyer of the option is buying opportunity, but not the obligation, to establish a futures position at a specific price for a defined length of time.


The buyer of a put option is buying the right, without the obligation, to sell a futures contract.


The fact there is no obligation to sell a futures contract is why the buyer of an option will never have to add more money to his option account if the market moves against him. After you pay for your option, no one will ever request more of your money to hold that option position; that is to say, no margin calls.


Our clients who bought $9.00 September SRWW puts bought the right to sell September SRWW futures at $9.00 any business day they wish to do so between the day they bought the put option until the close of trading on August 26th, 2022, the expiration date.


Some clients bought $10.00 September puts. They could have bought $9.10, $9.20, $9.30, etc all the way up to $17.40 or all the way down to $3.20. These values are called strike prices.


The option’s value, called its premium, trades in cents per bushel for 5,000 bushel contracts because the futures contracts are 5,000 bushels. The smallest price change (tic) of the premium during trading is one-eighth of a cent.


Below is the screenshot of September 2022 SRWW puts ranging from a strike price of $8.60 to $10.40 as of the close of business last week.


The $9.00 and $10.00 puts are circled. Note the column labels.


You can see the $9.00 put settled at 26-0; that means 26 and zero-eighths of a cent per bushel. The premium (cost, value) of the $9.00 put at the close was $1,300, which is 26 cents times 5,000 bushels.


Likewise, the $10.00 put settled at 58 and seven-eighths of cent per bushel for a total cost of $2943.75 per option.


September wheat futures settled at $11.01. Why would anyone pay 59 cents per bushel for the right to sell September wheat futures at $10.00 or 26 cents for the right to sell September wheat at $9.00?

Get comfortable with the vocabulary: premium, strike price, put option (aka: put), tic, margin call, expiration date. More tomorrow.


 

Rain Days Update


The Western Corn Belt has 1 more rain days in the 10 day forecast than yesterday and the Eastern Corn Belt has 8 more rain days than yesterday.


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