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Deferred Call Option Could Help Farmers Reap Rewards
DR. AARON SMITH
KNOXVILLE, TENN.
Corn and soybeans were down; cotton and wheat were up for the week. Corn harvest has progressed rapidly in Tennessee and is currently estimated at 14 percent above the USDA’s 5-year average. With combines rolling and storage space limited, producers are often forced to sell corn at seasonally low prices. Producers should evaluate all marketing options available to them through their local elevator, other purchasers, and brokers. One strategy that may be appealing to producers is purchasing a deferred Call option. This allows the producer to maintain an ownership position after they sell their cash corn at the local elevator. This strategy would allow the Call purchaser to participate in a rally in corn markets via an option to buy a futures contract. For example, a producer could sell 5,000 bushels of cash corn in Memphis for $3.40/bushel ($17,000 total revenue) and purchase one $4.00 May 2017 Call option for $0.09 ¼ (5,000 bu x $0.09 ¼ = $462 ½). The most the purchaser could lose is the total call premium of $462.50. However, if between now and May, the May corn futures contract exceeded $4.09 ¼ the purchaser would obtain a profit (the amount in excess of $4.09 ¼). The major benefit of buying a Call option over purchasing a futures contract is the maximum loss is known.
Harvest soybean futures peaked this week on Tuesday at $9.94 and then fell to close the week down 11 cents. Low export sales and greater than expected early yields were the primary drivers for decreased prices. There is significant support for November soybeans near $9.40, however if that threshold is breached a decrease down to $9.00 could occur.
Cotton prices had a good weak but a bad Friday. December prices peaked at 72.36 on Thursday before retreating to close at 70.07 cents on Friday. For the short term cotton prices will likely continue to trade between 66 and 72 cents.
Corn
December 2016 corn futures closed at $3.36 down 1 cent since last Friday. December 2016 corn futures traded between $3.32 and $3.42 for the week. Across Tennessee, average basis (cash price-nearby futures price) strengthened at Memphis and Lower-middle Tennessee and weakened at Northwest Barge Points, Upper-middle, and Northwest Tennessee. Overall, basis for the week ranged from 27 under to 20 over the December futures contract with an average of 6 under at the end of the week. Ethanol production for the week ending September 16 was 981,000 barrels per day down 23,000 from last week. Ethanol stocks were 20.016 million barrels, down 191,000 barrels. This week’s Crop Progress report estimated corn condition at 74 percent good-to-excellent and 7 percent poor-to-very poor; corn dented at 93 percent compared to 87 percent last week, 92 percent last year, and a 5-year average of 91 percent; corn mature at 53 percent compared to 33 percent last week, 48 percent last year, and a 5-year average of 48 percent; and corn harvested at 9 percent compared to 5 percent last week, 9 percent last year, and a 5-year average of 12 percent. In Tennessee, this week’s Crop Progress report indicated corn condition at 64% good-to-excellent and 11 percent poor-to-very poor; corn dented at 99 percent compared to 98 percent last week, 97 percent last year, and a 5-year average of 99 percent; corn mature at 93 percent compared to 85 percent last week, 83 percent last year, and a 5-year average of 84 percent; and corn harvested at 61 percent compared to 38 percent last week, 36 percent last year, and a 5-year average of 47 percent. Downside price protection could be obtained by purchasing a $3.40 December 2016 Put Option costing 13 cents establishing a $3.27 futures floor.
Corn net sales reported by exporters from September 9-15 were above expectations with net sales of 36.3 million bushels for the 2016/17 marketing year. Exports for the same time period were up from last week at 53.3 million bushels. Corn export sales and commitments were 33 percent of the USDA estimated total annual exports for the 2016/17 marketing year (September 1 to August 31) compared to a 5-year average of 32 percent. Dec/Mar and Dec/Dec future spreads were 10 and 39 cents, respectively. In Tennessee, January 2017 cash forward contracts averaged $3.56 with a range of $3.22 to $3.70. March 2017 corn futures closed at $3.46 down 1 cent since last Friday. December 2017 corn futures closed at $3.75 down 1 cent since last Friday.
Soybeans
November 2016 soybean futures closed at $9.55 down 11 cents since last Friday. November 2016 soybean futures traded between $9.52 and $9.94. For the week, average soybean basis weakened or remained unchanged at Memphis, Northwest, and Upper-middle Tennessee and strengthened at Northwest Barge Points and Lower-middle Tennessee. Basis ranged from 27 under to 40 over the November futures contract at elevators and barge points. Average basis at the end of the week was 11 over the November futures contract. This week’s Crop Progress report estimated soybean condition at 73 percent good-to-excellent and 7 percent poor-to-very-poor; soybeans dropping leaves at 46 percent compared to 26 percent last week, 50 percent last year, and a 5-year average of 43 percent; and soybeans harvested at 4 percent compared to 6 percent last year and a 5-year average of 5 percent. In Tennessee, this week’s Crop Progress report indicated soybean condition at 78 percent good-to-excellent and 3 percent poor-to-very poor; soybeans dropping leaves at 54 percent compared to 36 percent last week, 43 percent last year, and a 5-year average 39 percent; and soybeans harvested at 5 percent compared to 4 percent last year and a 5-year average of 4 percent. November/December 2016 soybean-to-corn price ratio was 2.84 at the end of the week. Downside price protection could be achieved by purchasing a $9.60 November 2016 Put Option which would cost 23 cents and set a $9.37 futures floor.
Nov/Jan and Nov/Nov future spreads were 6 cents and -6 cents, respectively. In Tennessee, October/November 2016 cash forward contracts averaged $9.78 with a range of $9.48 to $10.20 at elevators and barge points. Net sales reported by exporters were below expectations with net sales of 32.2 million bushels for the 2016/17 marketing year. Exports for the same period were down from last week at 29.0 million bushels. Soybean export sales and commitments were 45 percent of the USDA estimated total annual exports for the 2016/17 marketing year (September 1 to August 31), compared to a 5-year average of 48 percent. January 2017 soybean futures closed at $9.61 down 10 cents since last Friday. November 2017 soybean futures closed at $9.49 down 3 cents since last Friday. November/December 2017 soybean-to-corn price ratio was 2.53 at the end of the week.
Cotton
Delta upland cotton spot price quotes for September 22 were 71.21 cents/lb (41-4-34) and 73.96 cents/lb (31-3-35). October 2016 cotton futures closed at 69.08 up 1.34 cents since last Friday. Adjusted world price (AWP) increased 1.06 cents to 58.85 cents per pound. This week’s Crop Progress report estimated cotton condition at 48 percent good-to-excellent and 16 percent poor-to-very poor; cotton bolls opening at 48 percent compared to 41 percent last week, 54 percent last year, and a 5-year average of 56 percent; and cotton harvested at 6 percent compared to 4 percent last week, 6 percent last year, and a 5-year average of 7 percent. In Tennessee, this week’s Crop Progress report indicated cotton condition at 79 percent good-to-excellent and 4 percent poor-to-very poor; cotton bolls opening at 67 percent compared to 54 percent last week, 53 percent last year, and a 5-year average of 56 percent; and cotton harvested at 4 percent compared to 1 percent last week, 1 percent last year, and a 5-year average of 2 percent. December 2016 cotton futures closed at 70.07 up 2.79 cents since last Friday. December 2016 cotton futures traded between 67.18 and 72.36 cents this week. Downside price protection could be obtained by purchasing a 71 cent December 2016 Put Option costing 2.84 cents establishing a 68.16 cent futures floor.
Dec/Oct and Dec/Mar cotton futures spreads were -0.99 cents and 0.36 cents, respectively. Net sales reported by exporters were up from last week with net sales of 197,900 bales for the 2016/17 marketing year and 1,800 bales for the 2017/18 marketing year. Exports for the same period were up from last week at 157,700 bales. Upland cotton export sales were 46 percent of the USDA estimated total annual exports for the 2016/17 marketing year (August 1 to July 31), compared to a 5-year average of 45 percent. March 2017 cotton futures closed at 70.43 up 2.82 cents since last Friday.
Wheat
In Tennessee, September cash wheat prices averaged $4.34 with a range of $4.18 to $4.47 for the week. Nationally, the Crop Progress report indicated spring wheat harvested at 98 percent compared to 94 percent last week, 99 percent last year, and a 5-year average of 100 percent; and winter wheat planted at 17 percent compared to 6 percent last week, 16 percent last year, and a 5-year average of 16 percent. December 2016 wheat futures closed at $4.04 up 1 cent since last Friday. December 2016 wheat futures traded between $3.99 and $4.11 this week. December wheat-to-corn price ratio was 1.20.
Dec/Mar and Dec/Jul future spreads were 24 cents and 46 cents, respectively. Net sales reported by exporters were above expectations with net sales of 20.6 million bushels for the 2016/17 marketing year. Exports for the week were down from last week at 20.3 million bushels. Wheat export sales were 52 percent of the USDA estimated total annual exports for the 2016/17 marketing year (June 1 to May 31), compared to a 5-year average of 53 percent. March 2017 wheat futures closed at $4.28 up 3 cent since last Friday. March 2017 wheat-to-corn price ratio was 1.24. In Memphis, June/July 2017 cash wheat ranged from $4.38 to $4.41. July 2017 wheat futures closed at $4.50 up 1 cent since last Friday. Downside price protection could be obtained by purchasing a $4.50 July 2017 Put Option costing 33 cents establishing a $4.17 futures floor. ∆
DR. AARON SMITH: Assistant Professor, Crop Marketing Specialist, University of Tennessee
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