In February, it was my opinion that we could have a difficult year as far as price goes. The crop insurance guarantees were being set at a low that we had not seen in a very long time, and it was my opinion that if we had an average crop year yield wise with low prices that we would see some farmers have to exit farming.
Because I am also a broker, I was able to design a strategy that only cost a few cents per bushel that raised the guaranteed price floor substantially over what the crop insurance guarantees were going to be. My crop insurance customers were shown this as we discussed insurance for this year, and I wrote about it on this blog back in February. On Friday, October 27, the soybean spread expired. This is the chart from February that diagrams the strategy.
In hindsight, the strategy performed wonderfully! If you participated with this strategy, you had price protection all year at $10.12 net after the cost of the options. The strategy only cost .08 per bushel, but yielded .345 per bushel after the cost was factored in. If you used this for 50 bushels of soybeans, you added $17.25 per acre in revenue to your farm. The strategy actually protected $1.32 per bushel or $66 per acre in revenue that the crop insurance would not touch had we had a major price event. Don't tell me back in June you weren't a little worried. Note that the Fall Harvest Price for crop insurance is being set this month.
The chart below shows the actual outcome of the strategy. The area shaded in yellow depicts the above chart and the time since the strategy was created in the unshaded area to the right. The November options expired Friday with Nov Beans at $9.7675. The horizontal purple line shows where the price floor was set. The blue horizontal line shows where your crop insurance floor was if you had an 85% RP policy.
The Harvest Price Guarantee for corn is also being set this month, but there is still a month to go before the corn spread expires. If prices were set today, the corn strategy would perform even better than the soybean spread on a per acre basis. The spread is worth .36 today. Take that times 150 bushels of corn and the spread is worth $54.00 per acre today. This strategy only cost .057 per bushel or $8.55 per acre.
When we are at a place with tight margins, we really need to consider strategies that give you more protection than your crop insurance does. Most of the farmers in this region of the country are enjoying record yields. If that was not the case this year, it would have been tragic for a lot of farmers. Our yields bailed us out. We cannot always count on out yielding low prices. A strategy such as this does not cost much, and allows you to take control of price risk you face.
Give me a call or an email if you have any questions which I did not address in this post.
Since calling a bottom of corn and wheat back at the end of August, neither have really gone anywhere. The initial thrust out of intermediate cycle lows have not produced strong rallies over the last year. In the July 2017 wheat chart below, you can see where I recommended selling wheat puts, and the first cycle was flat both times.
The synthetic position from the 2018 July Wheat contract I recommended last month is basing as well. This is not bearish behavior. It is simply a market that needs to burn through a bit more bullish sentiment.
Had you sold the puts back on August 29, you could have collected over 50 cents a bushel to add to your corn, soybeans, and wheat marketings assuming wheat is over $4.75 at expiration. While it is possible, I don't believe corn is going to rally 50 cents. Corn would have to rally to $3.95 achieve that sort of gain which would be nearly a 70 retracement. A 50% retracement to the $3.80 levelwould be much more realistic which would be only .35.
Wheat on the other hand does not even need to make it to the 38.6% retracement to keep all the premium. Wheat only needs to reach tie 200 day moving average for it to be a profitable trade.
By Thanksgiving, I expect to be pricing 100% of my 2017 corn around $3.80, plus adding an extra .52 from this synthetic position. When you add to this the $1.05 from the other synthetic trades, this will give me a total of $5.37 for 2017 corn.