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 has planted 2000 acres of soybeans, with expected production of 110,000 bushels. He has been fairly aggressive in marketing this year, with 80,000 bushels (72% of his expected crop) already priced at $10.00. Combined with his 85% Revenue Protection insurance policy, Anderson is 88% hedged against the risk of lower prices, while HedgeTRAK suggests being somewhere between 68 and 78%. Concerned that the ongoing weather issues could lead to higher prices, Anderson would like to buy back some upside against the bushels he has priced, while also reducing his hedge % down to the high end of the recommendation.
Executing the following trade–buying 10 contracts of the November 11.00-12.20 call spread for 17 cents offers a chance to get back more than $1.00 per bushel on 50,000 bushels if the price is above $12.20 at harvest.
Standard Matrix: Note the improvement in profitability from $60 an acre at current prices up to $91 at the highest price listed.
The matrix + test: For a cost of $5 an acre, the trade improves profitability above $11.20 and ends up adding $25 an acre in profit above $12.20.
The trade itself: Buying 10 SX17 11.00 calls, Selling 10 SX17 12.20 calls for a total cost of 17 cents per bushel.