Protect Your Market Risk with Minimum Price

Monday, March 16, 2015

March 31 USDA Report + Uncertainty = Need for Risk Management
The USDA’s March 31 crop report is just days away. With uncertainty surrounding this year’s report, farmers concerned with the potential for market volatility will want to be prepared. One way to do this is with Cargill’s Minimum Price contracts, which are designed to help manage your risk – a factor that grows with every bushel of unpriced grain in your bins.

Acreage estimates in the March 31 crop report set the market tone for the next three months. In several of the past 11 years, futures have fluctuated significantly in the days immediately before and after the report (see graph).

This year’s report has the potential to be a market mover, as there is a lot of uncertainty around the factors farmers take into account for deciding how many corn versus bean acres to plant. This uncertainty is driven by three key factors:  lower commodity prices, steady fertilizer prices (which remain relatively high) and the uncertainty of spring weather.  Industry analysts are predicting that more acres will switch to beans—but volume is unknown, and will remain so until the end of June when actual planting data is reported.

How Minimum Price Works
Minimum Price is a variety of options-based contracts, ranging from a simple call or put to more advanced combinations that help hedge your downside risk with the potential to capture some upside. And unlike buying an option from a broker, Cargill’s Minimum Price requires no upfront brokerage costs or margin calls.

Let’s walk through one simple scenario:

Perhaps you’re worried about the market dropping after the March 31 report, so you purchase a Minimum Price put set to expire on April 3 for an investment of $0.13 per bushel. The contract is based on May futures, currently at $4.00. If the market does drop and settles at $3.50, you would net a price of $3.87—the difference between the contract’s start and end prices, minus the investment cost of $0.13.

If the market rises and finishes above the initial market price, your contract value remains unchanged, and your cost is limited to the $0.13 put.

“With Minimum Price, you’ve managed risk and slept easier knowing you had your downside protected—that’s worth something,” says Ryan Lauer, a Cargill Farm Marketer who manages contracts for farmers in eastern Iowa. “It’s a contract that can be customized to fit your bias and help you execute your grain marketing plan.”

With futures prices hovering around the break-even point for many farmers, a 20-cent change in price means $36 an acre on 180-bushel corn—a potential tipping point in profitability.  

According to Lauer, “Minimum Price can potentially protect $20, $30, or even $40 an acre, but then also give producers the upside to try to meet their profit goal.  We put on this strategy to take out a lot of risk in case the market goes down with the opportunity to participate in any uptick.”

A Stabilizing Tool
Minimum Price lets you stabilize your position before the March 31 USDA report. You can select the futures month, customize the date ranges of your option, and apply the contract to your sold or unsold bushels.

“If you leave futures open, you’re in penny for penny. If the market moves down 50 cents, you just lost 50 cents,” Lauer reasons. “With Minimum Price, you can protect yourself from volatile swings.” Lauer recommends aiming for a three-to-one ratio, meaning you should think you can capture about a 30 cent gain from a 10 cent investment.

Be Prepared with Minimum Price
For producers who have strong market bias and want a floor price for their grain, Minimum Price may be just the contract. It can provide protection for a limited cost, when price is uncertain.

“If the market has an upside and we have grain to sell, we’re happy,” says Lauer of the coming weeks. “If it goes down, and we have no price protection, we may be stuck with that for the next three to four months.”

Have unpriced bushels in your bins or future bushels you want to protect? Call your local Cargill Representative to walk through Minimum Price scenarios. Then, on March 31, you can read your favorite farm news with healthy curiosity—and know you’re protected.