Page 12—Com Talk, Lancaster Farming, Saturday, February 22, 1997
The (aim management exercise this past summer evaluated the use ol futures and options to
managa price nsk Early indications were that carryover clocks ol com would b* less than 5 percent ol
use. which would have bean the lowest ralio on record In mid-summer prices skyrocketed and were
extremely volatile Cash maiket prices were in excess ol 5550/bushel or nearly double what they were at
the same lime in 1995
When I wrote up the exercise back on July 10, the Chicago futures price tor December com was
S 3 58 December basis over the past 7 years has averaged +50 1 5/bushel, this meant that the
Pennsylvania price In December was expected to be around $3 73/bushel as ol last July 10 On
December 16. com was selling lor an average ol S 3 87/taushel m Pennsylvania (S 3 91 In the southeastern
pan at the state, 52.66 In the central pan, $2 79 In the south-central pan, and S 2 94 in the western part)
What happened and when?
Prices lor Decerrtjer futures peaked In mid-July at around S 3 90/bushel By early to mid-August,
com futures prices had dropped to around 5315/bushel Much ol this was due to the discovery ol
additional com stocks and the substitution of other feeds Prices rallied m mid-late August, but went Into a
steep decline on the news ol higher than expected early harvest yields and lower export sales the
extremely low stocks also led to regional shortages that reduced the com consumption rats In late
summer As a result, the final stocks o( 426 million bushels were somewhat higher than expected earlier
As additional Intoimation on the size ol the national com crop revised production estimates upwards,
December futures prices have (alien to $2 67Axishel as ol December 16 The latest USDA crop report
puts the 1996 com crop at 9 27 billon bushels (the thud largest crop on record), up almost 16% from
earlier estimate! of • billon bushels Carryover stocks are expected to be over 1 billion bushels next
September
What would have happened It we would have bought a put option lor a December futures contract
In mid-July. late-August, or even as tale as sarty-October? In mid-July the futures price was around
$3 60/bushel This means that we could have locked in an actual net sales price ol S 3 73/bushel by
exercising the option to sell a futures contract' In late-August the futures price had rebounded to the
S 3 50/bushel level alter falling to around S 3 20/bushel earlier in the month At this point we could have
locked in an actual net sales price ol $3 63lbushet with the option 1 In early October the futures price had
fallen to around S 3 00/bushel However, even at this late date we could have locked-ln an actual sales
price of 5313/busheP The Important point is that even It we locked-ln the price after the late July highs,
we would have an effective price above what the local market cash price Is In mld-Decentier
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Corn Club Posts Complete Contest Results
(Continued from Page 11)
Com Futures and Options Farm Managsmant Exercise
Jayson K Harper
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Corn Futures and Options Farm Management Eaerclce (continued)
The linn management exercise generated little interest this past year A total ot twelve com dub
participants relumed their surveys 01 this twelve only tour indicated they would either sell a futures
contract or buy a put option The remaining eight decided to take their chances on the cash market
Taking their chances could have cost these producers over $1 OOfbushel Even it prices had Increased
over the futures price, the only cost would have the premium and brokerage lees on a put option and the
com could still have been sold lor the higher price 4 Although the volatility ollhe IM6 com market was
unusual. It does point out the benefits of futures and options as part of a marketing strategy that manages
pnee nsk rather than solely taking your chances on the cash market
Notes
' Mid July futures price minus the December 16 futures price plus the local cash market price minus the
brokerage commission
($3 $0 -$2 71) +s2B7- $0 03 -$3 *3
’ Late-August futures price minus the December 16 futures price plus the local cash maiket price minus
the brokerage commission
(S 3 50 • S 2 71) + $2 87 - $0 03 ■ S 3 63
3 Earty-October futures price minus the December 16 futures price plus the local cash market price minus
the brokerage commission.
(S 3 00 -S2 71} +5267• SO 03 ■s3 13
‘For example, on July 10 an option to sell a futures contract at $4lO had a premium of $0.62 On August
20, an option to sen as 3 40 futures contract had a premium of $0 20 In the first case, we were toeking-ln
a minimum price of $3 45/bushel ($4lO -$062 - $0 03) In the second case, we would have locked-in a
minimum price of $317/bushel ($3 40 -$O2O • $0 03) If cash market prices increased above the futures
price, we would benefit from the higher cash market price, but the option would then be worthless
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