With feed barley prices weighed down by tonnes in their bins and tonnes more in the field, some farmers are looking south to the corn belt for feed market action.
They’re selling barley and buying corn call options on the Chicago Board of Trade, hoping to cash in on relatively tight U.S. supplies and some concerns about this year’s corn yields.
It can be a risky strategy, say many analysts.
But John DePutter, who advises clients from London, Ont., has been telling readers of Wild Oats markets newsletter for months that the time is ripe.
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“If you get a weather scare, you could get a lot of fierce buying coming into the futures market,” DePutter said. “And if you don’t get that, you’re going to get big global demand later on for U.S. corn.”
He said barley growers who sell now protect themselves from the possibility of falling barley prices. By buying a corn option, they insure they won’t be cut out if feed markets make big gains.
“The most you can lose is the premium you pay for that option,” DePutter said. “So you don’t have a lot of risk.”
He told his clients to look at May 1998 corn calls. His tentative recommendation is to take profits on the position when futures rally around the $3 (U.S.) per bushel mark.
“I think between now and April, when the May calls expire, we’ve got a good shot at a run to at least that price level.”
And if corn doesn’t rally? “You’ll probably be glad you sold your barley, because it’ll mean all the feed markets are flat.”
Only a small percentage of farmers in Western Canada use corn call options to hedge their barley, DePutter said. “I would not recommend it for absolutely everybody.
“Once you start dabbling in these various marketing alternatives, you have to be savvy or you can throw away a lot of money.”
Alberta Agriculture market specialist Doug Walkey sees the strategy as speculating rather than protecting against volatile prices.
“It’s risky,” said Walkey. “You’re dealing with a different crop grown in a different climate in another country with a different currency.”
While barley and corn prices usually move in the same direction, sometimes they don’t track, said Growers’ Marketing Services analyst Charlie Pearson.
Barley options traded on the Winnipeg Commodity Exchange aren’t always practical because they’re thinly traded, the analysts said.
Taking a position in Winnipeg barley futures could be an alternative, but might require more cash flow.
“If you bought futures and the price goes down, you’re going to get a margin call for that amount,” said Pearson.
With the guaranteed price of options, farmers know how much they’ll cost when they write the cheque for the premium.
But Walkey finds the threat of margin calls keeps farmers on their toes. He says options are an expensive way to be complacent.
He knows someone who bought an option at $4. Its value rose to $15, but the owner decided to hang on for $15.25. The option expired, worthless.
