Article written by: Samantha Trcka, Risk Management Associate | StoneX Financial Inc.
Ready or not, harvest is here! The long hours spent planning, planting, hoping, and now harvesting can take a toll on a person. Now comes the time to put your marketing plan in action. For some, that plan includes putting the crop into a bin until it is time to sell and deliver. While others rely on harvest delivery to town.
If you fit the latter description, you may feel torn between selling grain now to the elevator/cooperative and paying monthly storage fees hoping the market continues to rally.
So that begs the question, what options are available to you when selling off the combine but think the market could move higher? How can you remain a player in the game?
Here is a look at 4 different contracts/strategies to consider when bringing grain to town.
Extended Price Contracts
(with your grain buyer)
How it works:
– Sell grain at the current cash price
– Choose what futures month to enter within the current crop year
– Elevator buys a futures contract, allowing you to remain in the market
– Upon the decision to exit, elevator sells the corresponding futures position
– Final cash price = original cash price +/- any gain/loss on the futures position
Benefits
– No longer subject to storage fees, secondary shrink, discounts, or basis change
– Risk
– If futures go up, you gain; if futures go down, you lose
The Cost
– Varies by elevator/coop, but typically a couple cents/bu administrative fee
– Sometimes a fee to roll contract months
Minimum Price Contracts
(with your grain buyer)
How it works
– Lock in a floor price on the grain sale
– Select the call options underlying futures month and futures exchange
– Elevator/Coop buys a call option on behalf of your account, allowing you to take advantage of increases in the futures market after you’ve sold the grain
– Title of grain is transferred to buyer upon delivery
Benefits
– Take advantage of a potential futures price increase at a point in the future
– No storage charges or additional charges if the market moves lower
– Full minimum price is paid upon delivery (less the premium paid for call option)
Risk
– With a set basis, you cannot take advantage of any basis gains
The Cost
– An upfront premium charge for the cost of the option
Price Later Contracts
(with your grain buyer)
How it works
– Deliver grain without establishing a cash price
– Passes ownership to the buyer when contract is issued
Benefits
– Take advantage of futures and basis improvements
– Move grain when convenient while pricing later
Risk
– Subject to downside market risk
– No payment until the grain is priced
– Can only sell at the current cash bid when deciding to price
The Cost
– Check with your local cooperative/elevator about free price later offerings
– Typically charged a small fee
Working with Broker/Introducing Broker (IB)
How it works
– Use a broker/IB to buy/sell futures and options representing portions of your grain
Benefits
– No physical commitment of grain, just a paper transaction used to accumulate gains/losses
– Broker may provide professional marketing advice along with trading services
Risk
– Can result in losses
– Must maintain a brokerage account (margin calls)
– Must offset any hedge position you have with the broker
Futures/Options trading isn’t right for everyone, call a brokerage firm to decide if it fits you and your operation
Find a qualified broker at https://www.stonex.com/Contact-Landing-Page/
Or contact me directly at Samantha.Trcka@stonex.com or 952-852-2914
This material should be construed as the solicitation of trading strategies and/or services provided by the FCM Division of StoneX Financial Inc., or StoneX Markets LLC (“SXMâ€) as noted in this presentation. These materials have been created for a select group of individuals, and are intended to be presented with the proper context and guidance. Information contained herein was obtained from sources believed to be reliable, but is not guaranteed as to its accuracy. These materials represent the opinions and viewpoints of the author, and do not necessarily reflect the viewpoints and trading strategies employed by the FCM Division of StoneX Financial Inc. or SXM. The trading of derivatives such as futures, options, and over-the-counter (“OTCâ€) products or “swaps†may not be suitable for all investors. Derivatives trading involves risk of loss and past financial results are not necessarily indicative of future performance. Any hypothetical examples given are exactly that and no representation is being made that any person will or is likely to achieve profits or losses based on those examples. The FCM Division of StoneX Financial Inc. is not responsible for any redistribution of this material by third parties, or any trading decisions taken by persons not intended to view this material. This material does not constitute an individualized recommendation, or take into account the particular trading objectives, financial situations, or needs of individual customers. Contact designated personnel from the FCM Division of StoneX Financial Inc. for specific trading advice to meet your trading preferences or goals. All references to and discussion of OTC products or swaps are made solely on behalf of SXM, a member of the NFA and provisionally registered with the CFTC as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECPâ€) and who have been accepted as customers of SXM. Reproduction without authorization is forbidden. © Copyright 2021. All rights reserved.