Good weather bad on wallet
It is an irony of grain markets that the fine weather farmers smile at usually leads to lower prices.
Good weather means bigger crops and more supply.
That’s the case this spring. A U.S. Midwest frost damaged the winter wheat crop while spring wheat areas were affected by soggy soil, and in the worst cases, flooding.
Traders reacted, driving up wheat prices.
But traders are an emotional bunch. They don’t react, they over react and when it turned out frost damage wasn’t too bad and the crop did get seeded, prices steadily slithered down.
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But price drops can lead to opportunities.
Several market watchers, including Growers Marketing Service’s Ken Ball and Palliser Grain’s Lorna Casavant, are telling producers to buy low, sell high.
Buy call options, that is.
A call option is price insurance for a rising market.
They give the right, but not the obligation, to buy a futures contract in a certain month at a certain price.
And like insurance, it costs to buy it although options are less expensive than futures contracts.
When the market drops like it has, call option premiums also drop. Bargains appear.
But often the market runs up in summer as traders get concerned about a period of dryness or threat of frost.
Out of the game
If you have already locked part of your crop at a lower price through a deferred delivery contract, you’re on the sidelines.
But with a call option, the premium rises as the futures contract goes up. For example, a canola grower might want to consider soybeans options.
Old crop supply in the U.S. is very tight. The price did go up to ration supply until the new crop comes in, but then fell as demand dropped.
But the situation is volatile and late last week they were rising again.
Last week on the Chicago Board of Trade, a September soybean call option for $8 (U.S.) a bushel cost about 18.75 cents a bushel. They are sold in 5,000 bushel units (about one rail car load) so the total would be $937.50.
If the price ran up to, say, $8.50, the premium for your call option would rise. Selling it would generate a profit of about 33 cents a bushel or $1,650 in total, before brokerage costs.
The down side is if the price never rallied, you’d lose the premium.
