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How to Capture Price Gains After Contracted Too Early

Good morning, Roger, When you make recommendations to sell July 22 wheat $6.60 or higher are you recommending a 10% sale or are you leaving that to the farmer to decide? I just wasn’t sure if you kept track of percentages sold or not? Also, I for one try to be an active marketer and forward sell into profitable prices. On a year like this I obviously sold much too early. I would really like to try to make a few $ in this market to prevent me from feeling like I completely messed up this year! Last week you sent an email that (I believe) suggested if you’re a forward seller keep forward selling. I am a young farmer so always looking for the reassurance. Thank you for your time, Oscar


Good morning, Oscar.


Of course, the percentage of the expected crop to price is all your choice.


I am a 100% guy. If the market outlook justifies pricing one bushel, it justifies pricing all of it, but one must use the proper market tools to price 100% of crop before one knows if he will have a normal yield.


Here is how I want you to price 100% of your production:


This is exactly what you need to say to your prospective buyers (grain merchandisers) of your new crop corn, wheat and beans:


As you know, the high futures price is usually before the size of the crop is known and I want to have a shot at catching a price near the top on 100% of my expected production.

I am looking for a merchandiser who will allow me to engage in a HTA contract for 100% of my expected production before I know for certain what my production will actually be.

You can make that possible for me if you will let me contract on a HTA for 100% of my of expected production. If I come-up short on bushels, I want to be able to roll the delivery of those bushels to the next crop year. I will take the risk on the spread from one crop year to the next. I fully realize the market may be inverted. That is at my risk, not yours.

One of the reasons us farmers don’t sell enough of their production at a profitable price is because we want to have more grain to sell if the price continues higher. Eventually, no matter how high the price goes, the price will peak, then fall like a rock and all us farmers still have a lot of unpriced bushels we held back to sell at a higher price.

I am also seeking a merchandiser who will buy put options for me and attach them to my HTA, just like you do calls now. I will only buy puts if the market firms after I price the HTA so I can make the money on the way down I did not make on the way up. I will never exercise a put; I will either have you sell the puts or I will let them expire worthless.

If I buy corn puts at strike prices 30 cents apart and bean puts at strike prices 40 cents apart, my market plan will probably capture the top of the market without any stress on me or you.

Will you buy corn puts at 15 cents and bean puts at 30 cents for me and attach to the HTA delivery contract?

What is the fee for HTA, the fee to roll to the next crop year and the fee to purchase puts?


Oscar, you can do this in your own futures account, but I do not recommend you hedge 100% of production in your hedge account; there is no limit as to high prices could go and, thus, no limit on how much margin money it may take. If the merchandiser will do the 100% HTA and let you roll the shortage to the next crop year, but not buy the puts, you can buy the puts in your own account.


Once the puts are bought, there will be no margin call… ever.


So, when you think it is time to price your wheat, and you can price 100% of it at what you think is near the top of the market. Why not price all of it if you can roll any shortfall in bushels to the next crop year and the puts will capture the extra profit if prices go higher after you price the HTA?


Why not price 100% of expected production?


Come on, why not? For what reason, why not?


You expect a normal yield most years or you would not be farming. When prices are profitable and the seasonal trend is down, it means it is time to sell. I know wheat rocketed higher after you sold 2021 wheat, but it was not because there is a shortage of wheat. Quite the contrary, the world had a larger carryover than ever before just three months ago and it is only slightly smaller now


If you are somewhat comfortable with futures, do the HTA at the elevator and be ready to bear spread old/new crop (sell old crop and buy new crop). When the downtrend begins, the nearby months will go down more and faster than the new crop and you will make more money with that spread with less cash tied up than with the options.


We do not know how high prices will go and we do not know when the high will be made, but we have a pretty good idea and history indicates the high will be made before the crop is made. Of course, it may not rain for the next two months and a repeat of the rally we just saw the past eight months is possibility. What does the weather normally do? It normally gives us enough rain to make a crop; that is why they call it “normal weather”.


In the case of wheat here in the spring of 2021, wheat traded to eight year highs not because there is a shortage wheat, but because corn and bean prices have forced wheat to enter the bidding war for acres around the world, high priced corn means more wheat be used to feed livestock, Russia manipulated the wheat market all winter long, and the world’s biggest wheat importers, the Middle Eastern countries, hoarded wheat for the past year because they feared coronavirus would make it impossible to buy wheat. Most of those countries have one and half to two years’ worth of wheat stockpiled.


However, what we do know for sure with 100% certainty, prices will be far less than current levels in the not too distant future. On the crops you sold too low, get with your merchandiser and ask if he will buy puts when you are ready. If not, get your hedge account open and look for a different merchandiser.


Roger


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