is this a year for a punt on options

[4course]

ive never been that keen on entering into options and over the years have not seen any financial benefit nor regretted not doing anything but a few years ago we did and made a profit on the gamble. This year is looking now like it could be one in which it may makes sense to have a look . I am coming to the view that uk aint going to have much if any exportable surplus thus we will become net importers in 2019 free world stocks as opposed to world stocks dont need much of a knock and im thinking next may uk futures price is going to go up and at current levels given my current estimated 18 yield (lower than usual average) and forward prices think they warrant a look see .
as an aside I wont enter into any grain contract option or otherwise with any other than those I trust and have traded with for years

 

[Clive]

most merchant use brokers to facilitate the option - why not deal direct with the same people ?


as for if its your reasoning above is sound only time will tell ! at least with a option your gamble is limited and risk managed

 

[yellow belly]

So sell wheat for nov then buy back an option
Or sell for June 19 and capture the carry

This years carry has been very low as the consumer needs to get the grain off the farmer

Will you do all expected yield
Or just sell half an keep half

Until 08 option were cheap and usually expired worthless but in 08 they could make £100 extra

 

[4course]

So sell wheat for nov then buy back an option
Or sell for June 19 and capture the carry

This years carry has been very low as the consumer needs to get the grain off the farmer

Will you do all expected yield
Or just sell half an keep half

Until 08 option were cheap and usually expired worthless but in 08 they could make £100 extra

I would only do a limited %of expected tonnage think it was about 10 yrs ago since we did some ,if I remember right similar circumstances as we felt grain was going up in£/t against what we were looking at in the field, I cant see us having a bumper harvest and to be frank not so sure we will manage our long term average yield the way the weather is panning out( hope im wrong ) .I will stick to my tried and trusted marketing system but would possibly gamble a % above cost as a just in case we miss out scenario as it is almost a win win or at worse a win draw unless of course grain plummets but then we will all be ferucked and as clive says above its a manageable risk bit like spending on say a pass of fungicide/ growth reg which at the moment we will have missed one unless it dries up and grows 6 inch in the next few days

 

[Brisel]

I suggest you read the summary of the latest WASDE report from the USDA. This year world wheat stocks are forecast to rise to an all time high. I'd say the upside is somewhat limited. That will be why options are cheap!

June 2019? That's not a futures month. Has anyone looked at the cost of an option that far ahead? Don't forget we could be under €93/t WTO tariffs by then too, with a small exportable surplus which will dictate prices.

I suggest anyone not au fait with options talks to someone like @CRM AgriCommodities

 

[rose pilchett]

Disturbed to hear farmers discuss hedging instruments designed to assist producers and buyers of a commodity to manage risk with the terms 'punt' 'gamble' etc

Again I feel uk farmers could do with being better educated in this area, I studied finance type subjects at uni ,
What gets covered at your average Agri college? Or Harper?

 

[Brisel]

Farmers are the ultimate long position holders. If that's not a gamble then what is?

 

[yellow belly]

Disturbed to hear farmers discuss hedging instruments designed to assist producers and buyers of a commodity to manage risk with the terms 'punt' 'gamble' etc

Again I feel uk farmers could do with being better educated in this area, I studied finance type subjects at uni ,
What gets covered at your average Agri college? Or Harper?

to use a risk reducing strategy which one to pick is the gamble

on average what ever strategy you do turns out about the same average price over the long term
using different stratagys each year can lead to hitting the top every year or hitting the bottom every year the problem is knowing which is the right one to use is only known after the year is completed

the biggest unknown is the eventual tonnage to sell in a year when you sell pre harvest and everyone has a poor harvest and prices double the forward seller sells less percentage of the crop at a high price using options every year protects this but option need management and come at a cost that is near to their value in the long run option sellers need to make a profit or they go bust or put their prices up

in reality over the last 20 years the farmer who harvest all his grain then decides when to sell after harvest on average has the highest total return over the 20 years

at marketing school I believe one of the first rules is you cannot beat the market
are those that do just lucky and are those that think they always do just waiting for a fall

when you have skin in the game it is much harder 100 of times harder
fundamentally agriculture is a weather related gamble with a human element and no one has found a way of predicting the weather more than a week forward with any degree of accuracy despite modern technology

 

[4course]

I like the expression skin in the game that and having the courage of your convictions pretty much sums my thinking up , right now may18 futures bears little resemblance to the actual price last bid £153 a few days ago and if the same scenario is in place for next may where does that put physical grain? £10 in front ? no one knows but im pretty sure I and alot more arnt going to be breaking any yield records even if from now on we have perfect conditions. im well aware that some will say we are in a global market, but that 1 ton production under what makes us an importer not an exporter is worth far more than folks will have us believe

 

[yellow belly]

We have had very wet conditions before and still got higher than average yields

The autumn for the big grain growing areas was a good one for crops
With good establishment and plenty of tillers
May and June is more important for yield than jan to March

 

[4course]

average yields in the uk mean a situation of the uk being a net importer 2019. There is not the acerage sown and to my eyes most crops are not as good as we as farmers would like. I dont have the confidence to say I will yield above average at the moment, does anyone? .Im well aware that things can change but time is running out and what ever any body thinks im fairly sure my shed will not be as full as last year. There are acres under water or waterlogged where ever I go and here I reckon ive got at least 5-10% (which is a prettylow %) that will struggle but effectively means ive 30% that will only be average at best and I cannot see the other 70% pulling yield up beyond a reasonable level to end up with higher than average yield . I would be delighted to have my pessimism proved wrong though in nearly 40 years of farming this patch im not optimistic

 

[CRM AgriCommodities]

Disturbed to hear farmers discuss hedging instruments designed to assist producers and buyers of a commodity to manage risk with the terms 'punt' 'gamble' etc

Again I feel uk farmers could do with being better educated in this area, I studied finance type subjects at uni ,
What gets covered at your average Agri college? Or Harper?

Couldn't agree more! These tools are designed for producers and consumers to reduce the 'punt'. Being able to fix a worst case price for a commodity produced in the future and still be exposed should prices rise (for sellers), is far less of a 'punt' that holding - for example - 2/3 unpriced until November following harvest. This is the very essence of risk management, reduce the downside risk and still benefit from opportunities.

Its all covered on this course (not biased), which many farmers have benefitted from https://crmagri.co.uk/about-us/products/crm-training-portal/

Next course - 12th April

To quote one farmer; 'it was the most valuable day of my farming career and something I wish I had done much sooner'

 

[yellow belly]

For the 20 years or more up to 2001 the was little gain fron Hedging strategies
Or may be up to 2007 8
The farmer who harvested the sold after harvest may have had a bit lower price
When grain prices got more volatile
In 2012 all the gains from all previous hedging was eclipsed by the £100 increase that year waiting till after harvest paid

The problem with all strategies is how many tonnes will you harvest scaled up selling forward selling wait and see or take an option
Fall down when final yield either rises as price fall or price rise as final yield rises but some years final yield falls as price falls
Because there are too many unknowns prediction is no better than a guess

Farmers often follow the price up then follow it down
Taking emotion out is very hard because you remember last years mistakes
That is why many farmers get on with farming and leave grain trading to a pool

 

[CRM AgriCommodities]

most merchant use brokers to facilitate the option - why not deal direct with the same people ?


as for if its your reasoning above is sound only time will tell ! at least with a option your gamble is limited and risk managed

Agree, it is always best to deal directly with a broker when buying options, for the following reasons*:

Transparency - you know what the market price (going rate) is for the option and won't pay a premium for buying it 'second hand' (view LIFFE call/put option prices every day in our daily news)

Price Discovery - Options are prices based on volatility, duration, strike etc. and not whatever price the vendor wants to attach to them.

Standardised contracts - an option can be resold rather than just being bought and exercised or held to expiry. The advantage of this is that if you buy a call option and 2 months later your market opinion changes, you can reclaim some or all of the premium which you paid.

Security - The default/ counterparty risk is minimal as brokers are regulated, and the exchange guarantees the option seller and buyer both meet their contractual obligations. This removes the risks of sellers defaulting as some farmers may be nervous of.

Alternatives - Farmers can buy both call and put options, therefore, they can protect downside risk without committing physical volume to a merchant/ trader. Farmers can also select their strike prices and expiry to suit their budget/ circumstances.

* @CRM AgriCommodities are neither brokers or traders, so the above information is totally independent and unbiased (we are not trying to sell tools or buy grain). We do help put farmers in touch with the best people whether brokers or merchants.