Farmers crafting marketing plans for 2018 crops likely will try to sell rallies during the growing season. But the timing of sales is easier said than done, a reality proven by the market last spring and summer.
Though futures offered a shot at profitable hedges, seasonal selling strategies that worked for corn were losers for soybeans.
Corn and soybeans languished into the end of June. Then prices briefly rocketed higher in early July. Weather concerns proved short-lived. Corn prices ground steadily lower into the end of the year. Soybeans broke hard into August, then staged an unusual rally into harvest and another in December, giving growers multiple chances to lock in profitable prices.
These difficult markets are one reason why the average grower is still sitting on around 60% of their corn and 55% of their soybeans. But focusing entirely on old crop can mean missing the boat on the start of the 2018 selling season.
The average grower has made a start on new crop sales, but still has priced less than 10%. So there’s plenty of work to do, and for some it should start now.
These chores likely won’t involve actually pricing 2018 crops with futures, options or forward contracts. Most years prices are falling into winter lows in February, making it a bad time for hedges. But those low prices, plus lower volatility, tends to reduce the cost of buying call options.
Buying calls during periods of seasonal weakness in late February, April and May that on average precede rallies in March, May and June has been a good way to overcome one of the difficulties in making sales in the first place. Owning calls, which convey the right to buy futures, provide an answer to that nagging question, “What happens if the market rallies after I sell?”
In theory if price rise enough the calls will increase in value, adding to the selling price.
Combining a call with a sale is known as a synthetic put. Decoupling the two transactions provides better net gains than merely purchasing put options, according to Farm Futures long-term study of selling strategies.
From 1985 to 2017 for corn, the synthetic put beat the harvest price nearly as much as selling futures or hedge-to-arrive contracts outright. Both strategies reached an average of 15 cents above the average cash price at harvest.
For soybeans, the buy call/hedge strategy wasn’t as effective. It earned around 19 cents on average, compared to 30 cents a bushel for the outright hedge. But it did control losses in unusual years like 2012, when hedgers in the study would have netted $2.21 a bushel less than the harvest price on average.
Most years aren’t like 2012, and the calls expire worthless. That’s what happened in 2017, when hedging beat the synthetic put by more than a two to one margin.