August 19th, 2010


It’s an option.

 

An early summer of range bound grain trade has ended. July saw wheat prices climb from an opening of $5.06 in the December Chicago contract on July 1^st, to a closing of $6.9375 to finish the month. If we go back to mid June through the high on August 6^th the December Chicago wheat contract saw a range of just over $3.95. In comparison, December corn has seen more than a 68 cent range from July 1^st to August 16^th. November soybeans saw $1.55 range in the same time frame. 

Since the highs made in wheat on August 6^th markets have set back rather quickly. Wheat is trading more than $1.50 off the highs that were seen just 10-15 days ago. Late June and early July headlines and outlooks made $6.00 wheat, $3.90 corn, and $9.40 soybeans look pretty attractive. Those levels were quickly surpassed. Dry conditions across Russia have taken most of the Black Sea wheat exports off the market, possibly until December. Weather conditions across the southern U.S. along with the potential for strong export demand in corn and soybeans markets had been enough to spark buying across those markets. More recently, trade has seen the outlook for Russian weather to improve along with nearing corn and soybean harvests that still have the potential to be very large crops.

Producers today have several marketing avenues they can pursue. Some provide more opportunity, along with risk. Others allow us to lock in more concrete figures. Each avenue has its advantages and disadvantages. Although options are often shrugged off by producers due to the premium involved in volatile markets, this year’s market provided us a reminder of why options are available and important to the marketing arsenal. An “at the money” wheat put purchased in early July may have cost a producer in excess of 70 cents. That same option would have been nearly worthless a short time later as markets rallied. The silver lining in the option purchase versus the outright sale of futures, forward contracting, or hedge to arrive is that a producer who bought a $6.00 “at the money” put for 70 cents, or more, was only out the premium paid for that option and as we saw this year, he may have had the chance to make a second sale, or purchase another option later taking advantage of some of that rally.

I point this out to illustrate the importance of learning about and understanding the different marketing tools that are available to producers. The rate and degree to which wheat markets advanced in July is rarely seen, but having access to and the understanding of different marketing tools can give producers a greater opportunity to be successful in all market conditions.