Heil Harvesting, Ulysses KS/Limon CO | I know your country down there as dad and i cut wheat in that area, tough country to know what a guy will come up with before May 1, and then it is not certain....from an ag advisors stand point
As I see it you have two options:
Fork out the dough for a put on your best guess at production. Insurance average if you do not graze. Normally i would suggest selling a call to offset that cost, but that is risky where you do not know if you will produce. You could still do this though. If the call is not excercised (strike price is not reached) all you are out is the put premium and chances are if you do not raise a crop that put can be sold to recover some of the value, or if it is excercised and the price of wheat goes down, you win on the futures gain. Bottom line puts are expensive: 870 call is going to run about 70 cents. A guy could sell a 990 call and buy an 820 put for about even money, floor of 820 and ceiling of 990, but if we go over 990 you will be issued a short position there, could get ugly if wheat goes up up up do to frost (or anything else) and you do not produce a crop. IF you produce a crop what you gain in the cash markets balances the loss in the futures out, so you still sell for 990.
Sell the board, price goes down you are a winner, price goes up at least all you are out is the price difference as opposed to coming up with the physical to cover the cash contract.
If you sell a call or sell the board, that gets to be alot more like speculating and a lot less like hedging where you do not feel you are gauranteed production. Nothing wrong with it, just something to think about.
Best option as I see it is to see if you can get a cash contract with an act of God clause, but I doubt AGP or Peavey would do that, maybe if they are desperate for wheat....don't know what other options you might have for cash bids
Interested to see how others answer this.
Off topic: Do you have any grazing?
Edited by beh 1/22/2008 20:48
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