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    4/17/2014 11:10:00 AM

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  • Short-dated new crop options another attractive tool for risk management

    by Joe Camp

         Short-dated grain options were first listed in May 2012 and are quickly gaining popularity as a risk management tool for elevators and producers alike.  Daily open interest in corn and soybean short-dated options has more than tripled since the beginning of 2013.  Short-dated options seem to be gaining favor over serial and weekly options, products that are also newly listed within the past few years.  There has been a lot of talk about short-dated options lately, so let’s take a look at some of the specifics.

         The underlying futures contracts for corn, soybeans, and wheat are listed for the underlying futures months of December, November, and July, respectively.  Short-dated wheat options cover both the Chicago and Kansas City contracts.  Contract months for corn and soybeans are March, May, July, and September.  Wheat expirations are December, March, and May.  Last trading dates fall on the last Friday of the month before the listed option month, as long as two trading days follow the last Friday. Otherwise, expiration is the third Friday.  See the chart below for information on short-dated listings, courtesy CME Group.


    OP Graph


         Because the short-dated option expires before expiration of the standard new crop option, premiums on the contract are lower than premiums for the standard option.  The premiums assigned to all options by buyers and writers are valued with respect to the implied volatility associated with the underlying futures contract.  Changes in the premium are caused by changes in observed market volatility, along with changes in futures prices and time left until expiration.  While the price attached to changes in price and volatility is expected to remain reasonably consistent between short-dated and standard option contracts, there can be substantial differences in the portion of premium derived from time value.  Take for example the July short-dated 520 corn call option.  As of this writing, the premium on the contract traded about 20 cents less than the standard December 520 call.  Much of the 20 cent difference in premium is reflected by the fact that the short-dated contract expires nearly five months prior to the standard December option.

         Short-dated options are an attractive tool because the contracts allow the producer to hedge risk within specific timeframes throughout the planting and growing seasons.  They are also a useful hedge for open futures positions, especially around USDA report days when markets can be volatile.  

         Contact AgriVisor for quotes or for more information on short-dated new crop options.  


  • The Farm Bill in 16 Days??

    by Cory Winstead


         I had a chance to listen to Chuck Spencer Executive Director, Corporate and Government Relations at GROWMARK, Inc. speak last week in Ohio and Indiana. He had some real good points on the Farm Bill and felt they needed to be shared.  He was kind enough to provide his thoughts below.

         16 Legislative business days remain on the legislative calendar before year end.  Why is that important for the Farm Bill?   You may recall that the current farm bill extension expired September 30, 2013.  We also learned last year that nothing serious seems to happen until after January 1.   This is the same schedule “ground” we plowed last year.  What is different is both the House and Senate have passed a farm bill and conferees are meeting.   Staff has the non-controversial items negotiated and now it is time for the leaders to make decisions on issues where difference remains.  The commodity title of the House and Senate take different approaches to price swings for commodities.  A brief review of the specifics can be found at http://www.farmgateblog.com/article/1835/farm-bill-alternatives-what-is-on-the-table/ .    Note the Senate stays focused on base acres (decoupled from actual planted acres) and the House version couples payments to planted acres.  Base acres vs planted acres has a long history of policy discussion.   Planted acres could make a new farm bill more susceptible to World Trade Organization challenge by other nations as an unfair subsidy.  
         There are a number of battles within the farm bill like dairy, conservation, crop insurance tweaks, but the next largest battle will be the nutrition title.  Food programs are about 80% of the farm bill budget.  The House wants to cut $40 billion over a 10 year budget baseline and the Senate wants to cut $4 billion.  Negotiations have been rumoring in the $10 – 12 billion range.  With this much negotiation left to do and the end of this year fast approaching, negotiators are working hard.   You can read updates that clearly feel a deal is within reach and others with experience who will claim an extension is going to occur.  If you want a specific outcome, now is the time to be engaged. 
         Chuck does a good job summarizing this and check out the link he included.  It is time for all of us in our industry to stand up and engage ourselves in the process.  If we do not speak up someone else will for us and might not say what we want or would have.