In conjunction with Silveus Financial’s proprietary hedging benchmark, HedgeTRAK, we balance risk reduction with a farm’s potential profitability to create a multi-year Precision Marketing Risk Plan based on each farmer’s profitability goals.
In this example, a hypothetical farmer has planted 1,000 acres of corn. His expected production will total 190,000 bushels and he has already forward-priced 40,000 at an average of $4.00. Between the cash sales and his RP 85% crop insurance policy, he is 41.8% hedged, while the HedgeTrak suggests he should be somewhere between 57-67%.
Executing an options trade – buying the December 3.90-3.40 put spread and selling 4.20 calls on 50,000 bushels – gets the farmer back on track to 58% hedged and reduces exposure to the downside.
Standard Matrix: Note how profits decrease with lower prices down to $3.30 before insurance kicks in.
The matrix + test: Note the trade has now kept the farmer profitable to his insurance level, adding $11 an acre back to the matrix below $3.40.
The trade itself: Buying 10 CZ17 3.90-3.40 put spreads, selling the $4.20 calls for a cost of 6 cents a bushel.