so the local elevator apparently does not offer DEC12 corn contracts. I will start farming next year. I'm looking to lock in prices at a set level (say 6.50 for example). Since I can't hedge through the elevator, I thought i'd get clever and hedge electronically through my Ameritrade account...I want to know if i am thinking of this correctly.. If the DEC12 contract hit 6.50, i sell 3 contracts in my ameritrade accounts. If corn goes up, I simply sell my physical crop for the higher price and eat the electronic loss, averages out to 6.50 minus slippage between elevator's bid vs. CBOT bid (5 cents usually)... Is this a sound way to hedge my corn?
thats the whole idea, as far as I know. Of course, you must be able to meet margin calls, and be able to deliver the stated quantity. If something happened to your harvest , and corn ripped higher, you'd be in a world of hurt.
I wouldn't be too worried about a margin call, I'd put enough in there to absorb the rips higher....I'd love to see 10 dollar corn though.....well, maybe not as a consumer
If you are fully hedged then higher corn prices would be worse for you. You would have to keep depositing cash for margin and wouldn't get back the difference until you sell your corn. Very good point.
If you are concerned about crop failure (or margin calls) buy a put. Alternatively sell futures and buy calls. Either case you pay a price to limit max loss.
if u are a farmer, i suggest u get a banker. If u don't have a banker, ask your fellow farmers neighbor for a good banker. A banker will cover the margin and get u a Hedge Broker. Fail to do this result big losses. U need to let the professionals (banker and hedge broker) to hedge your crops.
I second this. Be conservative with your yield calculations. If you hedge 15,000 bushels of corn and you only harvest 5,000 (and Dec12 corn goes to $10 - which it probably will if everyone else's yield sucks) you are going to be in a tough spot. Also, if you intend to deliver against your futures contract, check the contract specs to make sure you can hit the type and quality that it calls for. If you want to put on a lower-risk hedge, buy 3 put options on DEC12 corn with a $6.50 strike if/when corn hits $6.50. Your hedging cost is capped at the option premium plus transaction costs. This is more of an insurance policy than a hedge, since you have to pay the premium regardless of the outcome. One way to "hedge" your yield is by purchasing crop insurance. It protects against crop failures.
I don't understand why more farmers don't trade in options, actually. Many of the advantages mentioned before (no margin issues, max loss capped in any case)... You get to lock in your price and yet still participate in any upside.
I got crop insurance, can't think of anybody who would want to with these crazy times (both weather and financial)....I also am very conservative with my estimates, so the usuall bases are covered... I'm interested in these put options...i usually uses barchart.com for my info...yet i don't see options listed..... I'm also open to other ideas of 'locking in a price' or 'protecting the downside'
See here: http://quotes.ino.com/options/?s=CBOT_C.Z12 Obviously further out you go in time.... more you pay. You might want to buy puts at a price significantly below current price. It's basically insurance against market "price" failure.