The Rural Voice, 1997-01, Page 33Playing it safe
Strategies to protect yourself against
fluctuations in feed grain costs
By Kevin Simpson
Livestock producers found out in 1996 how large a blow sudden grain price
increases can mean to their feed costs and their profits.
CU97: fine Slat Thu. Aug 1. 1006 0 End. Pm Dec 13. 1996
CIme
Nov
320 00
315 00
31000
305.00
300.00
295.00
290.00
395.00
290.00
275.00
270 00
295 00
29000
u.s.s
.per bushel
The September 1997 Corn Futures chart show a steady decline.
As a livestock producer you
may need to buy a large
amount of corn next spring,
and you may be hurt badly if prices
explode before you can buy it. If you
wnat control of your costs then
consider these choices:
• commit to a pricc now by forward
contracting with a neighbour cash
cropper or feed dealer
• commit to a futures price by buying
July or September 1997 com futures
at an advantageous time
• buy a corn call option
The first two choices have the
advantage of locking in price without
involving much of an initial cash
outlay. However, both of these
choices leave you unable to take
advantage of a drop in price. For the
corn buyer who wants a predictable
corn cost ceiling and yet take
advantage of lower corn prices then
you should seriously consider buying
call options.
For example, you can buy an "out
of -the -money" September corn $2.80
call option. Today it is worth 28
cents per bushel. In other words, you
have the right, but not the obligation,
to buy corn in Chicago for September
1997 delivery at U.S. $2.80 per
bushel. Today you would pay $2,800
U.S. for every 10,000 bushels of corn
that you want. That seems like a lot
of mey to me and to my clients but let
me explain the idea. You, your broker
and your lender will help you decide
how much protection you need and
how much you can afford.
Here's the result in two different
scenarios:
If corn futures rally from today's
$2.62 to $3.80 (an increase of $1.18 a
bushel) then we know that the call
will be priced at a minimum $1.00
per bushel ($3.80-$2.80). For you thc
owner of calls on 10,0(0 bushels, this
will be worth $10,000 U.S. for a
profit of $7,200 ($10,0(X) - $2,800).
. If corn stays the same or drops,
then the call option contracts will
expire with no value to recover. Your
benefit in this case is that you can
buy cash corn at the lower price thus
helping to offset your cash outlay
when you bought thc calls.
Now you can see that you gain if
com prices explode. You also gain if
you are able to buy corn at lower
prices in a falling market. The other
benefits arc: no margin calls that
JANUARY 1997 29