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Market Advisor: Market Pullback May be Opportunity to Buy Corn Call Options

Corn prices have been declining since late February.

By George Flaskerud, Crops Economist

NDSU Extension Service

Corn prices fell sharply following the release of the USDA's prospective plantings report on March 30. Corn prices have been declining since late February. These lower prices could be an opportunity to buy call options on new crop already sold as insurance against prices exceeding contracted levels. Alternatively, call options could be purchased for the courage needed to make additional new crop sales if prices recover.

The price objectives that I have been using in my example strategy for new crop corn range from $3.30 to $4.45 for December futures and get up to 65 percent of anticipated production sold. Futures fixed contracts would be used up to the guaranteed yield in a revenue insurance product. Put options would be used beyond that level. December futures, which reached a high of $4.29 on Feb. 22, closed at $3.69 on April 2.

Farmers indicated in the USDA report that they intend to plant almost 2.5 million more acres of corn than the trade was expecting. That drove prices down. If those acres hold up in the June 29 acreage report and growing conditions are favorable, then the high in the corn market probably has been established. It is more likely, given current strong soybean prices and high fertilizer costs, that corn acres will be less than the 90.45 million intended and that the weather will be less than ideal throughout the planting, growing and harvesting season. A big corn crop is needed for the growing use of corn for ethanol.

It is likely that marketing opportunities will resurface. In my example marketing plan, I will continue to use a price objective of $4.20 for December futures at 45 percent sold (achieved once already) and $4.45 for 65 percent sold. In addition, I would consider purchasing December $4.20 call options on at least those bushels during this pullback.

Suppose a December corn call option is purchased for 15 cents with a strike price of $4.20. Any futures price at $4.20 or less at option expiration will result in a loss equal to the 15-cent premium. At a futures price of $4.35, the transaction will break even. At a futures price of $5, the transaction will have a profit of 65 cents. The purchased option could be sold prior to expiration, in which case it could be worth more due to time value. The December corn call expires Nov. 20, 2007.

The fundamentals may be less threatening for wheat than for corn. Winter wheat acres were up 3.9 million from a year ago or 505,000 more than the trade was expecting and 416,000 more than the USDA reported on Jan. 12. At this point, the crop is in fairly good shape. Also, durum acres were up 120,000 (6 percent) from a year ago. Other spring wheat acres were down 1.1 million from a year ago, which was somewhat more than the trade expected. Although the number of other spring wheat acres is down, it still is considered sufficient to meet demand. While it is certainly possible that adverse weather could impact the wheat crop, it seems like there is more downside risk than upside potential.

Consequently, my example marketing strategy for wheat will continue to focus on preharvest sales without using call options. The price objectives that I have been using for new crop wheat range from $5 to $5.60 for Minneapolis December futures and up to 65 percent of anticipated production sold (45 percent achieved). Minneapolis December futures reached a high of $5.50 on Feb. 26 and closed at $4.94 on April 2.

Soybean prices faltered the least following the report. As of April 2, November futures only were 22 cents off the Feb. 22 high of $8.43. Because soybean prices already are high, the focus will continue to be to scale up sales without call options.


NDSU Agriculture Communication

Source:George Flaskerud, (701) 231-7371, george.flaskerud@ndsu.edu
Editor:Rich Mattern, (701) 231-6136, richard.mattern@ndsu.edu
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