How to trade corn options
Corn Continuous Contract
Fears for corn demand have recently been accelerated by a demand-driven plunge in oil prices, which could reduce ethanol needs. Values below 30 are considered oversold and those above 70 are overbought. Usually a contract does not like to spend much time outside of that range, and such anomalies are often precursors to rallies or declines, but the timing is not guaranteed. Corn futures spent nearly all of July in oversold territory before climbing out in early August.
Speculators may have set a weekly record with their extreme corn selling in recent days. The latest data from the U. Commodity Futures Trading Commission CFTC showed that as of March 10, money managers held a modest net short position in corn of 60, futures and options contracts. Trade estimates suggest that commodity funds sold just over , corn futures contracts through Tuesday, the next data period for which CFTC will publish data on Friday.
The weekly record is , futures and options contracts set on March 14, That would be the most bearish stance since early May , just as the disastrous U. But that is far from the record short of , contracts from last April, and there are 24 other weeks in records back to where the managed money corn short exceeded , The coronavirus pandemic has caused a collapse in global markets comparable to ones in and , since the virus has shut down economic activity on a massive scale.
Aside from the crash, only periods in and have featured larger downward moves on a short timescale. Futures and options contracts usually do not result in actual delivery of the commodity because most participants reach final financial settlements with each other when the contracts expire. These contracts, therefore, work only to limit the price risks attendant upon commodity sales. In a marketing contract, by contrast, a farmer agrees to deliver a specified quantity of the commodity to a specified buyer during a specified time window.
While futures and options contracts are highly standardized and focused for pricing purposes on a common quantity of a precisely specified product delivered to a single location, marketing contracts can be quite idiosyncratic and written to the needs of individual buyers and sellers. Marketing contracts may specify a fixed price at the time of agreement—thus locking in a price for the seller, or they may specify a base price often tied to a futures price with premiums and discounts applied to the attributes of products as delivered.
For example, buyers of hogs under marketing contracts may pay premiums for hogs that reach certain targets for leanness, while buyers of cattle may deduct for cattle that are too large or too small. Futures and options contracts are traded in large volumes on organized exchanges and are therefore excellent mechanisms for discovering market prices that will balance supply and demand, while allowing users to manage price risks.
In addition to providing some price protection, marketing contracts can provide incentives to produce products with specified attributes that buyers value. Marketing contracts provide farmers with assured outlets for their production, and they can provide processors with steady flows of uniform products for their processing plants.
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Farmer use of futures and options contracts is heavily concentrated among corn and soybean operations. During , 47, farms used futures or options contracts, and more than 93 percent of these farms traded corn or soybean futures or options contracts.
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More than , U. While corn and soybean contracts are widely traded on exchanges, and corn and soybeans are the two largest U. There are also deep markets in cotton, rice, and wheat, as well as cattle, hogs, and dairy products. Marketing contracts are more widely used across U. S agriculture: more than , farms used them in Marketing contracts are used by field crop and specialty crop operations and by cattle and dairy producers, but corn and soybean operations still made up 60 percent of all farms using marketing contracts in See figure below.
Larger corn and soybean producers are considerably more likely than smaller farms to use any of these market tools. Fewer than 5 percent of small corn and soybean producers used futures contracts, compared with 17 percent of midsize producers and 27 percent of large producers. Far fewer farms used options contracts, but farm size still mattered: less than 1 percent of small farms used options, compared with 9 percent of midsize operations and 13 percent of large producers.
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Marketing contracts were much more widely used than futures or options. At average reported crop yields, a standard-sized futures contract would encompass 29 acres of corn production or 96 acres of soybeans, and mini-contracts would require one-fifth of that acreage.
Corn (Globex) Futures Prices / Corn (Globex) Quotes : CBOT
Small corn and soybean producers, who often operate a mix of other enterprises such as cattle or poultry , do not typically harvest large acreages of corn and soybeans. Half of small corn and soybean operations harvested no more than 50 acres of soybeans and 42 acres of corn. Moreover, futures and options trading require some expertise, and the gains for small farmers from trading on small volumes of production may not be worth the investment in time required to gain skills and experience.
The personal characteristics of farmers also affect decisions to use contracts, particularly futures or options contracts. ERS researchers found that corn and soybean farmers who were at least 60 years old were considerably less likely to use futures or options than younger operators, even after controlling for differences in farm size.
Education also had an impact, albeit modest: Operators of corn and soybean farms who had a college degree were a bit more likely to use futures or options contracts. The survey showed 12 percent of corn and soybean producers were using futures, options, or marketing contracts, so most farmers of those crops do not rely on those tools to manage risks.
Corn Futures Market
The farms that do use those tools cover some, but not all, of their production with one tool. On average, farms that use futures contracts cover 41 percent of their corn production and 47 percent of their soybean production. When farms use marketing contracts, they sell similar shares under those contracts—42 percent of corn and 53 percent of soybeans. When they use options contracts, farmers cover a little over 30 percent of their production.
Farms generally use a portfolio of risk management tools and do not rely exclusively on any one tool. Farmers do not typically see futures, options, and marketing contracts as substitutes for each other. In fact, farmers that use one tool often use others as well. On-farm storage can serve as a risk management tool because it allows farmers to better time commodity sales if they anticipate higher prices in the future.