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BRIAN HOOPS

By Staff | Aug 5, 2011

With the weather and the grain markets starting to catch fire, volatility and pricing opportunities are increasing.

Not only will weather forecasts change daily, but emotions and price levels will as well. The key to marketing successfully in this type of environment is to stick to your marketing program.

By now, you should have a marketing program in place and be well into the heart of your plan as the key pricing and growing seasons are upon us.

If you were disciplined enough to write down you marketing objectives and goals, stick to your plan. Your plan should have prepared you for a price rally on weather concerns. Now simply follow your plan.

If using put options for downward price protection, do not jump out the moment prices look like they are going to move higher. It is not unusual to see a market move higher on the beginning of a weather rally, only to fall apart if the weather rally fails.

Many producers believe this year will be the year we go back to $7 in the corn market and $15 in the soybean market and they will sell their put they had previously bought for downside protection, only to find out later that it would have provided a valuable price floor.

Buy a put option for downside protection and keep it in place until proven otherwise.

In fact, producers should roll these put options to higher strike prices if the market continues to rally. As forshort call or short put options where risk is unlimited, be sure to use risk management tools.

A rule of thumb is that once the premium value doubles, liquidate the position. Remember, the markets will always be there, along with opportunities to re-enter. Riding a significant losing position can be difficult to manage monetarily and mentally.

If you feel uncomfortable selling futures or forward contracting, use the puts more aggressively.

That way, you leave your upside wide open, yet establish a minimum price floor and the limited loss potential will give you staying power until you need to remove the option.

If you have been an aggressive forward contractor of corn this year, do not be bashful about buying September or December out-of-the-money call options as safety valves.

If you have forward-sold soybeans, buy September or November out-of-the-money calls for insurance. Over the next two months, if crop conditions deteriorate, the sky is the limit for grain prices.

As an example, spending 20 to 40 cents on an out-of-the-money call option in corn could return you dollars in a drought market.

In addition, having calls in place may also give you the opportunity or confidence to forward contract more new crop.

The start of a weather market has developed and it can be very emotional. In summary, try and let the trend be your friend, but do not allow a market to rally and then watch it fall all the way back down before taking action.

Develop an in-depth strategy to approach the market and do not market by the seat of your pants.

A good strategic, well thought-out plan will perform better than trying to outguess where prices are going, because no one really knows for sure what the weather or what prices will do.

Brian Hoops is president and senior market analyst of Midwest Market Solutions Inc. Midwest Market Solutions is a full-service commodity brokerage and marketing advisory service, clearing through R.J. O’Brien.

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