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Can someone explain buying on futures

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Topic: Can someone explain buying on futures

Posted By: Sandknob
Subject: Can someone explain buying on futures
Date Posted: 02 Dec 2009 at 8:43am

I will be farming 5 acres next year (will be in corn), possibly with the option to pick up another 20 acres in 2011 if all goes well this year (it will be put in corn at that time as it will be in soybeans next year). Can someone explain to me how to sell using the futures market, and how to do so safely. I realize you don't want to try to sell all of your expected crop at that price, but is there a good general rule for a cutoff )example 1/3 of the crop, 2/3, 1/4, ??????)

If someone could shed some light on this it would be appreciated.

By the way I do not have any storage, so it all has to go to town.

Thanks

Adam

Right now corn is at

3.80 spot

3.85 Jan10

3.92 Mar10

4.05 Fall10

4.24 Jan11

These are all cash price

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Replies:

Posted By: Farrell(Utah)
Date Posted: 02 Dec 2009 at 10:27am

The Chicago Board of Trade used to have some nice practical publications explaining how to hedge or speculate on the futures market. A web search should locate a phone number. Good luck

Posted By: John (C-IL)
Date Posted: 02 Dec 2009 at 10:33am

Adam, I'm not wanting to discourage you from using the futures markets, but, at your size you should let the elevator assume the hedging risks for your grain marketing and stick to cash contracting.

If you really want to use the futures to hedge your selling decisions you should look at options. They will let you hedge your risk at a much better cost/risk.

CME has publications for you to read. You should also subscribed to a service like Agrivisor, it is free for Farm Bureau members.

Posted By: Gerald J.
Date Posted: 02 Dec 2009 at 10:36am

The pundits tend to say to sell a fraction of your crop each month. In past years the crop prices were best in June to August, but the last couple years they were best in February. Last year I sold a third of my anticipated crop in February for $4.02 cash (central Iowa) for Jan 10 delivery because I did not want the income in 2009 having just sold my 08 and half my 07 crops. In March or April I sold another third for $3.89.

A month before harvest I sold about a sixth for $3.55 and right after harvest I sold the rest for $3.57. I paid a lot for drying and storage of that two thirds of the crop to deliver in Jan 10.

For next year, I have just sold just under a quarter of the anticipated crop for $3.99 for October-November delivery. Yesterday during the morning CBOT was up ten, but closed down 4. Had I not been busy with other things, I might have sold more harvest delivery corn at $4.11. To get close to the daily peaks you have to watch the market constantly, most of us have other things to do.

Selling a bit a month keeps you from selling in a panic.

What you really have to do is work up your costs (including your own labor) and decide what price makes you a profit, and try to sell in groups so the average price is above your costs.

Since I have rented out my land on a crop share basis, I have a good handle on my costs and $4 cash corn looks pretty good to me. I can remember in the last 20 years taking a $1.98 per bushel check to the bank and smiling all the way. May have been a wry smile though.

I look for prices to be highest in February with a secondary peak in June, but that is just from the last two or three years of history, earlier history put the big peak in June. Hedge fund speculation has modified the market making prices leap and fall ignoring fundamentals of world supply and demand. Grab a good enough price when its available and dont sweat the high prices you missed. Be glad you were not cornered in low price times.

Gerald J.

Posted By: Gerald J.
Date Posted: 02 Dec 2009 at 10:44am

As a practical matter you won't grow enough crop to cover a CBOT contract. You can play the options board, but you don't need to grow a crop. You can grow a crop, but you don't need to play the options.

Deal with local elevator contracts, you can do those in small quantities, though the elevator may limit how small.

There are plenty of pundits around offering advice. Look for radio shows like "The Big Show" 11:30 to 1 on WHO (1040 clear channel) or WMT (600 KHz, Cedar Rapids), and TV like Market to Market on public television but also available on line http://www.iptv.org/mtom/default.cfm with podcasts, video, or text trascriptions of their market commentator reports.

Look to Kurt Kester, (always on WHO on Mondays), and others for market comments and selling advice. Kurt is good. Others have different viewpoints and since all are looking at flawed crystal balls, their comments may also be valid.

DTN offers market forecasts and reports and advice.

Gerald J.

Posted By: KenBWisc
Date Posted: 02 Dec 2009 at 1:05pm

With 5 acres of crop you will be speculating versus hedging as you don't have enough product to cover a hedge contract. You may be in the same boat if you froward contract with a local elevator, assuming one is willing at so little production, because if you don't get a crop you are still liable for delivery of the contracted grain and you don't have additional acres to hedge the bet. Check with a crop insurance agent, this may be your best option. Oh, and you'll find many people who can explain markets and hedging and you still won't understand it until you do it and get burned.

Posted By: Wil M (NEIA)
Date Posted: 02 Dec 2009 at 2:06pm

I agree with Ken. 5 acres at 150 bushel is 750 bushel expected production. A lot of elevators anymore don't like to mess around with anything less than a 1000 bushel cash contracts. Most producers will not forward price more than 50% of expected production. Since you are going to grow this corn next spring, you will want to watch the Oct or new crop 2010 bid. You can sell the Jan 2011 bid but you will have to pay storage to the elevator to get it to that point if you deliver it during fall harvest. Most elevators also charge extra for drying to storage moisture levels and the storage is an initial minimum charge for so many days.

There is not a "safe" way to deal with the futures markets. Just expect that you can and eventually will lose money. Even a true hedging elevator expects slippage in futures price but they deal with the law of averages. Hedging means offseting a cash position with an opposite futures position and eliminating your risk to basis only. This is hard for a true producer to do or even understand as they are contingent on the cash price that they receive and have to be willing to live with the potential cash price that they will set and have the ability to finance the margin calls and associated costs. You can use options but as a general rule 90% of all options expire worthless and the costs of using options have to be figured in on the cash price you are willing to live with.

Wil

Series 3 Commodities Broker

Grain Dept. Manager

Now the disclaimer:

Data and comments provided for information purposes only and not intended to be used for specific trading strategies. Information is believed to be reliable but is not guraranteed accurate or complete. Commodity trading involves risks and those risks should be fully understood before trading.

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"Yet there are soulless men whose hand and brain tear down what time will never give again." Anderson M Scruggs

Posted By: Wil M (NEIA)
Date Posted: 02 Dec 2009 at 2:09pm

Gerald offers sound good sound advice also.

Wil

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"Yet there are soulless men whose hand and brain tear down what time will never give again." Anderson M Scruggs