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, hypothetical farmer John Anderson expects a disappointing corn yield of 160 bushels per acre, about 30 below his average production. With an 85% RP insurance policy against an APH of 190, Anderson is looking at a projected insurance payout of roughly $50 an acre at the current futures price. Having already sold 75,000 of his expected 160,000 bushels, his overall profitability actually decreases now if the market rallies during the October insurance discovery period. Buying calls to protect against losing the insurance payout now makes sense.
Standard Matrix: Note that Anderson currently expects a profit of $20 an acre which actually increases if the market goes lower as his insurance payment gets bigger. Against a higher futures price, $3.95, Anderson’s $20 an acre profit turns into a $13 an acre loss.
The trade itself: Buying 10 CZ17 3.55 calls for 10 cents per bushel.