Melvin Brees
Farm Management Specialist
University of Missouri Extension

 

 

 

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Please send your comments and send suggestions to Melvin Brees, Farm Management Specialist, University of Missouri Extension, #1 Courthouse Square,  Fayette, MO 65248, call 660-248-2272, or send messages by e-mail to: breesm@missouri.edu.
November 3, 2000

Re-own on Paper?

This past week's grain price rallies suggests (or at least provides hope) that the market analysts, who believe the lows are in, might be right. This idea is supported by the seasonal trend for markets to rally following harvest and the fact that USDA's Weekly Crop Progress Reports indicates harvest is approaching 90% complete. Somewhat tighter World coarse grain supplies and early private forecasts that next week's USDA Supply and Demand Report will show further crop reductions also suggests the possibility of higher prices. This along with seasonal basis strength may provide the opportunity for profits on stored grain. But what if you have already sold the grain? Should you re-own it on paper to take advantage of higher prices?

Grain can be, in effect, re-owned by buying futures or purchasing call options. Buying a futures contract is a contractual obligation to take delivery of the grain in the future at the contracted price. This effectively gives you ownership of grain to be delivered in the future--you re-own the grain on paper. Since the futures markets are very liquid (many willing buyers and sellers), reselling the contract is easy and you shouldn't have to take delivery--all you need to do is sell the paper. If the price goes up, you sell the contract (or the re-owned grain) at the higher price. To insure that you will meet contract obligations, if the price goes down, you are required to post "good faith" money or margins to cover your loss.

You may prefer to purchase call options, instead of buying futures, because options avoid the risk of additional margin requirements if prices continue to move against you. Call options provide the right, but no obligation to purchase futures--it is effectively the right to re-own on paper. The disadvantage is that you pay a non-refundable price (premium), but it is a known cost and there will not be additional requests for more money to cover losses.

Re-owning on paper won't participate in basis gains or capture market carry. While re-owning grain on paper allows participating in higher futures prices, it is important to understand the shortcomings of this strategy--especially at this time of year. A significant portion of late year cash price gains is often due to strengthening of basis. Since this occurs in the cash market, futures or options can't capture this. Buying deferred month futures or options also gives up the storage returns the futures market offers (market carry), since a contract for future delivery pays some else to store the grain until the contract month.

Re-owning grain, that you've already sold, on paper can allow you to capture higher prices. However, you could be disappointed in the net result when compared to storing cash grain at his time of the year. It is important to understand that you won't get basis gains or market carry that can be captured by storing of cash grain. These along with the option premium, if you purchase a call, may offset a significant portion of any cash price rally. The strategy can work, but it depends entirely on a futures price rally. --Melvin


University of Missouri ExtensionDecisive Marketing - November 3, 2000
http://outreach.missouri.edu/agconnection/DCT/DM001103.html -- Revised: April 20, 2004
breesm@missouri.edu