CBT Corn December Calls???

[charliep]

A newsletter I get suggested looking at CBT December 210 corn calls. With today's close at $2.11 3/4, you have a call 2 cents in the money and a cost of 10 1/2 to 11 cents.

Has corn bottomed? Not likely as conditions in the US are close to perfect with the period you can impact yields lower only two weeks.

The theory would be you won't pick a bottom. If you went long futures today, you would run it with a dime stop loss underneath. The call allows you to spend your money up front and know cost. You can participate in rallies (if they occur). The option has 4 months left in it.

Thoughts? Strategy? Other opportunities.

[TOM4CWB]

Charlie;

As a cross hedge, what is your proposal?

Are you going to sell cash barley, and buy back a corn call, or are you speculating?

The way I look at marketing this year, most farmers are unhedged on feed grains, and the last thing we need to do is be spending more money on buying calls, unless we have a specific marketing need for upward price insurance.

I don't know if I am helping, but if I had western feed barley sold at $145/t, and was unsure if I had the barley as drought is around in some places, then wouldn't a OCT barley call out of the money at say $135/t make a more logical risk management strategy?

[melvill]

Tom, the idea of an out-of-the-money call on western barley isn't so bad except for two things:
1) in my opinion at $135 call is too far out-of-the-money with Oct West Barley bid at $114 today,
2) checked with my broker who says that barley options in Winnipeg aren't trading at all - neither are canola options now that Ex-Can (spelling?) is gone.

So we're back to trading corn call options as the only tool available.

[TOM4CWB]

Charlie;

To get WCE options takes a little work, but can be done, with a little patience.

Buying back a 135/t call when barley was hedged (sold) at 145/t is a risk management strategy, not a spec position. WCE quotes .10/t for a 135, and .70/t for a 125/t Oct call option. Therefore since hedge risk is being covered, it is not "too far out of the money", and the cost is certainly reasonable.

You would be surprised what can be bought, with a little work!

[charliep]

Tom4cwb

Would agree it is possible to trade WCE options on the buy side (either puts or calls) with patience. The issue in some cases is the exit strategy with difficulties sometimes in selling with the only alternatives excercise if in the money or let expire worthless if not.

Any thoughts on using options with a CWB Producer pricing option strategy? My big concern this fall for many farm families is cashflow. Unless a farmer has done forward pricing, the only crops that can generate cashflow in the spot market are canola and pulse crops (may not like price). Feed barley scares the tar out of me in that all things point to a monster demand vacuum from about Sept. to Dec. (virtually no cattle on feed).

What I am looking for is strategies that allow a farmer to capture value (and hedge price risk) for wheat delivered this fall. The CWB producer pricing options have major flaws but they are the only game in town. I am not necessarily negative on wheat outlook either - its just that I would like to see some real money deposited in the bank versus a crummy initial payment/promise of something better in finals (my memory is too vivid from this past year).

Spring price endorsement also comes in. As the market splips lower, it may be worthwhile buying some out of the money calls close to trigger levels on your SPE crops. This might allow a farmer to at least pay their premium if prices rally. Thoughts?

[TOM4CWB]

Charlie;

On the CWB PPO's;

I have been thinking of pricing but sober thoughts of basis costs for liquidation IF I don't have milling quality are really stopping me.

CWB Feed Wheat PRO is at $124/t leaving $80/t as total payment. But it does get worse, as there is a $30/t discount in the PRO spread between CW Feed and CWRW wheat....

BUT;

THE PRO Spread is not used to determine the discount... the initial spread is used instead... so what will the initials be?

What will the initial price spread be between the base PPO grades and CW Feed Wheat? Historically this spread is MUCH wider, which throws CW Feed wheat delivered to the CWB into an unrealistic option.... now we must liquidate the PPO, or pay to buy someone elses milling quality, creating much higher risk than the hedge can mitigate...

Charlie, have you done the numbers on what SPE trigger values will be?

Can you run over the 10% lower SPE values are for feed grains especially... I believe Canola is about WCE $310/t with a $12 basis to trigger the SPE, is this about tight?