Be cautious with exotic grain marketing contracts


While I don’t have exact knowledge of the company’s hedge positions during the time leading up to their bankruptcy, court documents give us some telling information. Gender roles in india On Sept. Love quotes for husband 16, 2008 VeraSun released the following statement:

“In July 2008, after corn prices had risen from approximately $6 per bushel at the end of May 2008 to almost $8 per bushel due to extraordinary weather conditions in the Midwest and broader market commodity trends, we effectively priced our corresponding physical purchases of corn at the then-current market price, which proved to be significantly higher than today’s market prices for corn.

Exchange rate hkd usd In addition, based on market forecasts that prices would continue to rise, we entered into a number of “accumulator” contracts relative to corn requirements for the third and fourth quarters that, in each case, allowed us to purchase a specified volume of corn at prices below then-prevailing market rates, but also required us to purchase that same volume of corn (in addition to the initial purchase) at one or more lower prices per bushel should market prices decline to or below those lower levels over the duration of the contract. Stock market terms and meanings Shortly thereafter, corn prices commenced a sharp decline from almost $8 per bushel to a low of under $5 per bushel in mid-August 2008. Gold prices today per ounce As a result, we were required under the accumulator contracts to purchase additional amounts of corn at prices that proved to be higher than prevailing market prices.”

Due to either financial (lack of liquidity to fund margin calls) or emotional stress, they lifted their short corn positions essentially locking in their hedge loss and locking in a final price for their physical corn purchases at very high prices historically.

This is pure speculation on my part, but I’m guessing they didn’t contract/hedge their ethanol at the time they lifted their corn hedges (or enough of it). Euro pound chart As a rule of thumb, a commodity business should be locking in revenue and the same time they are locking in costs. Hidden messages in songs This becomes more difficult in a low margin environment but when you’re locking in $7+ corn purchases you need to be locking in a sizable amount of the revenue side of the transaction.

The likely fatal blow…..entering into accumulator contracts where the company could purchase corn for below the market. Usd to can The contract made this possible because they likely sold multiple put options and used that premium to offset the market price of corn. Market futures oil The extra premium they received by selling the put options came back to haunt them as the market fell below the strike price of the puts. Equity meaning in hindi This meant that they had to “purchase additional amounts of corn at prices that proved to be higher than prevailing market prices.” They added a hedge loss to their prior hedge loss.

Hindsight is always 20/20 but farmers need to be cautious when hedging. Call and put options examples Financial markets have a tendency to move much higher or much lower than most of us expect.

Farmers are often pitched a variety of exotic farm risk management contracts. Eur usd chart live The phrase “there is no free lunch” is very relevant when discussing these contracts.

I’m not going to dive too deep into the details, but these contracts most often involve short options. Gender theory The farmer’s counter-party (grain buyer) is using your bushel commitment to sell options. Call option vs put option They keep some of the premium they receive and they pass the rest on to you.

There is nothing inherently wrong with these contracts. 500 kroner to usd You just need to thoroughly understand the risks before entering into one. How to convert inr to usd In today’s low margin environment, you don’t need any extra risk in your operation!

A short crop combined with an accumulator/double-up contract can be a fatal blow. Funny jokes and riddles If you do have a contract with a double-up contingency, make sure you keep some open and insured bushels available to fill it.

You will receive a base price plus a certain premium. Convert fraction to mixed number calculator Let’s assume today’s futures price for soybeans is $10.00 and there are 100 trading days left until expiration. Aud usd chart You are quoted a $.40/bushel premium in this contract. Fundamentals of futures and options markets pdf free download More on why you get this premium and what you “give up” below.

If soybeans trade below $9.00 futures, the contract ends and you receive a contract for the bushels that have already been priced by the contract. Usa today crossword If this occurs 21 days into the contract, you’d receive a contract for 21% of the original bushel size.

In addition to the Knock-out Price, there is typically a price above the contracted price at which you will be obligated to deliver an additional amount equal to the contract size if settled above at expiration.

If soybeans are trading above $11.00 at expiration of the contract (once again the contract specifics vary from contract-to-contract), you will be obligated to sell them an additional amount at the price equal to your current contract size.

Let’s assume, you contracted 10,000 bushels under this Accumulator. Oil meaning If the market is above $11.00 you’d be obligated to deliver another 10,000 bushels at $11.00.

Most of us (myself included to some extent) suffer from recency bias. Cnn futures pre market We tend to focus on the current trading range when viewing grain marketing opportunities while discounting the probability of large moves outside of this range.

We favor a simple profit-based, seasonal trend-focused grain marketing plan. Future trends in marketing We include a grain marketing plan builder in our farm management software that uses your farm’s costs, yields, etc.