2016 Fall Hedging and Re-Ownership Strategy

If you have un-priced bushels OR wish to re-own bushels you have sold at some point consider this strategy

Goal

• Reduce risk from un priced grain

Risks

• Basis

• Futures

Actions to Execute

• Set basis on bushels needed to deliver at harvest

• Bias is that basis could widen out

• Either price basis when you want to remove risk or buy a put to protect downside futures risk.

• Depending on yields and crop insurance guarantee downside price risk maybe somewhat limited in corn (soybeans are different)

• If you price a basis contract, remember that you have no upside participation. For this reason, we feel buying a put is a better alternative.

If you are buying a put to reduce downside risk, consider an at the money put

If you are buying a put to have ownership, consider something out of the money to save option premium $’s

• When you price the basis contract and want upside participation

• Leave put in place, Go long futures at that time, risk is spread between put strike and level you go long.

• Use a buy stop above the market, in case it goes lower..  you can then move buy stop lower

Benefits

• No basis risk if elevators get full.

• No storage, hauling, quality issues, etc.

• Ownership of grain is extended with limited risk through the end of February, plenty of time to see what develops in South America Harvest surprises covered (both bullish and bearish)

2014 was a prime example, bins full, huge basis, and the market rallied into January anyway.  After lots of "give up" selling at harvest on terrible basis, Funds decided to get long, big rally, no one prepared.

With lots of investment money potentially looking to "find a home" any issue could start a rally. This strategy gives us time to see while limiting our risk.