Grain Marketing Strategies: Meet Peter Paperfarmer

So far, I have featured ten famous farmers on Farm Futures in September 2021 (go to the Advanced Marketing class page to read about all of them).

Some, like Aunt Tilly and Terry Timer, sell their crops before harvest. Others, such as May Sellers and Earl Literor, are considering storage and post-harvest tactics to support grain prices. To date, none of my heroes have used options in their marketing strategy, but this is about to change. Meet Peter Paperfarmer, a grain farmer who believes in the value of restoring grain sales by purchasing call options.

There's no farm vault like Peter Paperfarmer, Barney Beanless (Farm Futures September 2021 issue). Like Barney, he sells grain at harvest time. Unlike Barney, he thinks it's worth having his own call options product again. For corn and soybeans, your price is the price of Barney's crop plus the profit or loss from buying the July option in the money on November 1 and selling it in mid-June. Peter will shed some light on the value of marketing plan options.

Peter's average corn price was higher than Barney's ($3.02 vs. $2.98) over a 33-year period (see accompanying graph). This is a good example of how "averages" don't tell the whole story. Peter's recovery strategy only made a profit on seven out of 33 harvests. In three of those years, his earnings have been modest, including July calls due in 1990, 1995, and 2019. The reality is that there are two big years (July ending in 1996 and 2022) and two big years (July ending in 1996). ends in 2008 and 2021). ) made enough money to cover 26 years of losses and made the average acceptable. Barney outperformed Peter by more than 10% in nine years, meaning calls are paid more than 10% of the cash price at harvest. Peter's performance in corn is an options story where he loses a little for a few years (premium paid) before finally making a big profit a year later. All you have to do is pick a good year, which is not easy to do.

Soy was different. The July call options resume gives Peter an average price that is 36 cents per bushel better than Barney's crop price. Peter profited from owning the ATM in 15 calls on July 33, which is an impressive average return for options. This result is unexpected and difficult to explain, apart from the fact that world demand for soybeans has grown rapidly in the last 25 years.

That's the kind of criticism I've heard about Peter. "You don't allow Peter to use his judgment to abandon earlier, more profitable options." This is a good time. However, if you want to suggest that in some years Peter may do better with his past performances, I agree that in other years he may do worse. Some of his best years required him to call ahead of the deadline. Who said you used to win big and leave your last dollar of profit on the table?

Next: If Buying Calls Isn't Cash For Corn, How Can You Sell Calls? Covered Cal is selling call options on available grain.

Edward Uset is a grain marketing economist at the University of Minnesota and the author of Grain Marketing Is Easy (Not Just Easy). You can contact him at [email protected].

How the farmer won the war of the flies