Option Basics: Protection from Buying and Selling Remorse

ByGrain Market Insider

Whether you’re a grain producer or feed purchaser, you know how important it is to build the best price you can, using a rather limited set of pricing tools. The riskiest approach is taking the market price – who knows where the market will be in the future? Alternatively, you can buy a futures contract or forward contract to lock in current prices on future sales. If you’re a seller, you can also store grain in the hopes you won’t need to sell it until prices are better.

Of all the possibilities – alone or in combination – along with some cash products through an elevator, only the purchase of put and call options allow you the potential to unwind some of the negative impact of a sale or purchase decision you make today on your bottom line. Think of put and call options as insurance to save you from thinking later, “I should have acted” or “I should have waited.”  

Deciding whether to purchase a put or a call has a lot to do with (1) whether you decide to purchase or sell grain now or to wait until later, and (2) where you want price protection. Let’s take a look at a variety of scenarios to see how this plays out.

Scenario 1: Protecting the Price of Unsold Grain Using Put Options

In our first scenario, you’re a farmer who grows corn. You know that the price of corn can be volatile and unpredictable, and you want to protect yourself against a potential drop in price. You decide to leave your grain unsold and purchase a put option.

A “put option” is a contract that gives the buyer the right (not the obligation) to sell a certain amount of corn at a specific price (called the “strike price”) on or before a certain date in the future. The buyer pays a fee (called the “premium”) plus a commission for the right to sell corn at the strike price.

In our example, the current price of corn is $6 per bushel, and you’re worried that the price might drop in the next few months. You purchase a put option to cover all your production with a strike price of $5 per bushel, which would give you the right to sell your corn at $5 per bushel if the price drops below that level.  

If the price of corn does drops below $5 per bushel, say to $4.50, you can exercise your put option and sell your corn at a net higher price of $5 per bushel less the premium and commission. If the price stays above $5 per bushel, the good news is that the price of corn didn’t collapse, and maybe even increased. In this case, you don’t have to exercise your option and you’ll only lose the premium and commission you paid for the option.

Scenario 2: Protecting the Price of Sold Grain Using Call Options

In our second scenario, you’re that same farmer, and you decide to sell your corn at the current market price of $6. While you think the price is good, you are worried that prices might go up and that you’ll lose out to potentially higher prices.  In this case, you decide to purchase a call option to protect your price. 

A “call option” is a contract that gives the buyer the right (not the obligation) to purchase a certain amount of corn at a specific price (called the “strike price”) on or before a certain date in the future. The buyer pays a fee (called the “premium”) plus a commission for the right to buy corn at the strike price.

Assume again that the current price of corn is $6 per bushel. You purchase a call option on all your grain with a strike price of $7 per bushel, which would give you the right to buy back your corn at $7 per bushel if the price rises above that level.

If it does, you can exercise your call option and “buy back” your corn at the higher price of $7 per bushel, and then resell it for any price above $7.00 and pocket the difference between the first sale and the resale, less the premium and commission. If the price stays below $7.00 per bushel, it means that you sold at a good price – and maybe even better than the market price. You don’t have to exercise your option and you’ll only lose the premium and commission you paid for the option.

Scenario 3: Protecting the Price of Purchased Corn Feed Using Put Options

In this scenario, you’re a cattle feeder that uses corn as feed for your cattle. You’re of a mind that prices have likely gotten near the bottom and decide to purchase feed for upcoming months. Nonetheless, there is some softening in the market that has you worried you might see prices drop again, and may end up paying more than your competitors for feed. In order to protect yourself, you decide to purchase a put option (the right to sell) to protect yourself from declining prices on all your purchased corn.

The current price of corn is at $6 per bushel. Much like the producer who fears he might be waiting too long to sell his grain, you purchase a put option with a strike price of $5 per bushel, which would give you the right to sell corn at $5 per bushel if the price goes below that level.

If the price of corn does decrease below $5 per bushel, say to $4.50, you can exercise your put option to sell your purchased corn at $5 and repurchase it for $4.50 plus the premium and commission you paid for the option. If the price stays above $5 per bushel, you paid a reasonable price for your feed given market conditions. In this case, you don’t have to exercise your option and you’ll only lose the premium and commission you paid for the option.

Scenario 4: Protecting the Price of Unpurchased Corn Feed Using Call Options

Finally, assume that you’re that same cattle feeder that uses corn as feed for your cattle. You’re worried that the price of corn might increase in the next few months, which could hurt your profitability. You’ve decided not to pre-pay for future corn purchases, and instead protect yourself against the risk of rising prices by purchasing a call option on all your anticipated feed needs.

Again, the current price of corn is at $6 per bushel. Much like the producer who feared he sold too early, you purchase a call option with a strike price of $7 per bushel, which would give you the right to buy corn at $7 per bushel if the price goes above that level.

If the price of corn does increase above $7 per bushel, say to $7.50, you can exercise your call option and buy corn at the lower price of $7 per bushel plus the premium and commission you paid for the option. If the price stays below $7 per bushel, the market price remains reasonable; you don’t have to exercise your option and you’ll only lose the premium and commission you paid for the option.

The Best Marketing Decisions Are Thoughtful Decisions

Options give producers and purchasers alike the right to buy or sell corn at a specific price, which can help protect against price fluctuations. As with all market tools, however, pay attention to how they work. More specifically,

  • You have to pay a premium and commission for this protection, and you need to do the math to make sure that the price you pay for that option is worth the potential reward if exercised, especially over the time frame of the options contract.

  • You don’t buy insurance against risks that are unlikely to happen. Keep that in mind as you think about the protection you are buying. It’s not clear in which direction the market is going. Think twice about buying protection when the potential for upward or downward momentum is minimal.

  • Just as we recommend making incremental purchases and sales, think about incremental option purchases. Coverage for an entire crop or feedlot is quite expensive. Instead, think about making targeted option purchases that fit into a broader strategy.

For almost 40 years, Stewart-Peterson Inc has helped producers like you make smart, thoughtful decisions about their marketing. We focus on the math of our recommendations to help make sure that the strategies you employ can make a discernable difference on your bottom line.

Call us at 800-334-9779 to see how we can help!

What Happens When China Stops Buying Our Stuff?

ByGrain Market Insider

There is no doubt that China’s entry into capitalism in 1978 has been increasingly beneficial for the U.S. soybean farmer. China’s wealth soared at an annualized 11.7% growth rate (compared to the U.S. at 5%). This has made meat far more affordable for more people in China and, completely unsurprisingly, has driven the need to import more soybeans. You only need to look at the charts (in addition to the emergence of renewable diesel as discussed in last month’s Special Report) to see that it appears the sky’s the limit for soybeans over the foreseeable future.


Source: GDP (current US$) – China | Data (worldbank.org)

Source: Our World  in Data using UN Food and Agricultural  Organization (FAO) data


Setting up a Policy to Launch an Economy—and Ultimately to Stifle It

One of China’s key resources as it embarked on capitalism in 1978 was its immense access to labor. Of course, to rearrange the economy, China needed to actually move people to the cities to support a rapid transition from a rural to urban economy. Apparently enacted to manage food insecurity, China forcibly controlled and changed the family structure from many children (which traditionally supports farming) to a one-child policy, which limited most families to one child.

Take a moment and let this sink it. China transformed its economy by enacting a social change that capitalized on a huge labor force, and at the same time ensured that, in the future, the number of people entering the workforce—that huge competitive advantage—would plummet year after year.

The outcomes have been catastrophic. Per McGill Policy Association, October 27, 2021:

  • By 2020, China’s total fertility rate had fallen to 1.3 births per woman rather than the 2.1 births per woman required to maintain population replacement, leading to fewer and fewer new entrants into the economy AND an increasingly expensive aging population to support.

  • At the same time, the one-child policy effectively over-produced boys in a culture that traditionally favored boys, further contributing to a declining population. Indeed, by 2020, the number of marriage-aged men outpaced the number of marriage-aged women by 1.2 million per year.

Seeing the potential for an upcoming crisis, in 2016 the Chinese government loosened the policy to allow for two children per family and for three in 2021. Nonetheless, without major intervention, China’s population has peaked, which has big implications for worldwide demand of soybeans:


  • An aging population in decline implicitly leads to a lower demand for Chinese Population food overall.

  • A resulting economy in decline is correlated to lower meat consumption, as wealthier economies tend to eat more meat.

From a timing perspective, the drop in population and demand will clearly happen over time. However, that shift in population has the potential to hit U.S. producers more quickly in the face of other Chinese government policies.


India to the Rescue?

Don’t count on India taking up the slack for U.S. producers as its population continues to soar:

  1. India has more land conducive to cultivation than China (395 million acres vs. 254 million acres), so it can handle more of its food and feed production.

  2. Culturally, the majority Hindu population avoids beef and the Muslim population avoids pork, thus limiting its need for feed.

  3. Much of the population remains in poverty. Because meat consumption is correlated with higher incomes, the potential for meat consumption (regardless of religious preferences) is lower.
    Source: The Western Producer, May 18, 2023

China Is Looking for a Return on Its Investment

As we see the potential for a consistent decline in demand for soybeans in China, at the same time, China has taken clear steps to shore up its supply needs for all sorts of inputs outside of the U.S. through its investment in Brazil. Since 2015, China has made clear its intent to invest in Latin America, and the bulk of its investment—almost half—has gone to Brazil. According to an article released by Springer in 2022, China’s Growing Presence in Brazil and Latin America, China has invested about $66 million USD to Brazil; about threequarters of that investment has gone to the energy sector, while the rest has gone to other sectors, notably infrastructure and agriculture. While China has been the recipient of commodities such as minerals, oils, gas and agriproducts, Brazil has benefited in industrial products and inputs.

Source: China Global Investment Tracker| Prepared by CEBC

From a Chinese perspective, it appears that the investments are made with strategic intent clearly to the benefit of China. According to BNamericas in their report “China’s role in Brazilian infrastructure projects not shared by everyone,” the Brazilian government is pleased with the investment. However, other players in the industry are concerned about the price Brazil is paying for that investment. For instance, infrastructure projects have progressed with equipment that can only be purchased from China, and China has required Chinese executive presence in other industries, such as banking. From a Chinese perspective, these investments that counter U.S. interests offer a way to assert their own dominance on the world stage. Investment and buying soybean products from Brazil clearly extend these goals.

Brazil Has Ample Motivation to Meet China’s Needs

Just as China is looking to Brazil to be a major supplier of soybeans, Brazil is well poised to meet that need. As we noted in a TFM Insight from March of 2022, the strength of the U.S. dollar relative to the Brazilian real has given Brazil incentive to compete in the soybean markets. As we noted, “The Brazilian soybean 2020/21 crop, for example, produced the highest profits in the nation’s history because of low domestic supplies and the depreciation of the Brazilian real relative to the U.S. dollar.”

The good news for Brazil is that it has vast resources to capitalize on Chinese demand and the dollar differential. In comparison to the U.S. according to farmdoc daily (Illinois.edu) in “Brazil Likely to Remain World Leader in Soybean Production,” Brazil soybean acreage is expected to grow 27% from 2021 through 2030, in contrast to 8.3% in the U.S. Unlike the U.S., which is getting close to using all arable land, Brazil is expected to expand land through a variety of strategies, including converting underutilized land to farmland, increasing irrigation, replacing other crops, and utilizing new agricultural frontiers.

Implications to the U.S. Farmer

Luckily, as we discussed in May 2023’s Special Report “Crushing Expectations,” the emergence of the renewable diesel is opening up a new market for domestic uses of soybeans. This has the potential of transforming the current model (which is focused on co-ops and exports) to a mixed model with a bigger emphasis on inland crusher/ethanol markets. We at Total Farm Marketing will be keeping an eye on the potential for lower world demand over the upcoming decades, and we’ll help you stay on top of longer-term trends. As in all industries, keeping on top of the broad trends that affect your industry put you in a far better position to act in your and your businesses’ best interests.

Look to Grain Market Insider to Help Keep You on Top

At Grain Market Insider, we’ve been around for almost 40 years through many market disruptions, both good and bad. Through it all, we’ve prided ourselves on helping our clients be prepared and prosper, no matter what the markets may bring.

If you have questions on how we can help, reach out to one of our Team Members at 800.334.9779 or visit us at GrainMarketInsider.com

Have Planted Crop Acres Peaked in the U.S.?

ByGrain Market Insider

The suburbanization and exurbanization of the United States are closely linked to an ever-marching retreat of farmland, according to a study by the American Farmland Trust (AFT). Clearly, we need to think through the implications to the integrity of local and regional food systems as development encroaches. We also need to recognize the impact to farmers, from the ability to acquire more land in the face of scarcity, farmer flexibility to sell to whom they choose, and even the planting decisions that will be more crucial in the face of growing demand. (A good example of changing demand is movement toward renewable diesel and the resulting anticipated surge in soybean demand as detailed in a recent Grain Market Insider special report “Crushing Expectations: The Explosion in Demand for Soybean Oil,” May 2023.) As a first step, however, let’s explore where acreage stands today and what the future holds.

Recent Trends in Principal Crop Acres Planted

Per USDA data, the last time that acres planted for U.S. principal crops hit 339 million acres was in 2012. Since 2014, acres planted have fluctuated between 303 and 327 million acres. Even with the high commodity price incentive over the last two years, acres planted to principal crops have not been able to break above the 318-million-acre level.

Over the past 20 years, the USDA data also shows a shift in the types of crops planted. In particular, corn and soybeans have seen an increase in acres planted, while wheat and cotton have seen a decrease. In 2023, corn and soybeans are expected to account for approximately 179.5 million acres, or over half of all principal crop acres.

Source: USDA, Agriculture Statistics Briefing, March 31, 2023

Where Have All the Acres Gone?

In their study “Farms Under Threat,”* the AFT first attempts to track what happened to lost agricultural land between 2001 and 2016 using spatial mapping analysis. This is the first nationwide attempt to identify the impacts of distributed, large-lot housing development on the agricultural land base. Their analysis identifies that agricultural land is increasingly being converted, fragmented, or paved over to support development. Of special concern, the report notes, is the loss of farmland to low-density residential development at the edge of urban and suburban areas.

According to the AFT study, 11 million acres of farmland were paved over – that’s 2,000 acres per day – fragmented or converted to uses that jeopardize agriculture. In terms of impact, 11 million acres equates to

the amount of acres devoted to fruit, nut, and vegetable production in 2017. It also equates to the estimated acreage needed to fuel the upcoming surge in soybean demand for renewable diesel. Not surprisingly, the pace of development has increased in recent years, with an average loss of 449,000 acres annually between 2011 and 2016 compared to 340,000 acres annually between 2001 and 2006.

The second part of the AFT study models potential agricultural land development scenarios from 2016 to 2040. In their Business-as-Usual scenario, they estimate an additional 18.4 million acres will be converted away from productive agriculture from 2016 to 2040. This suggests U.S. principal crop acres could fall below the 300-million-acre level in the next 20 years.

*Sources: Farmers Under Threat: the State of the States study and Executive Summary

What Can Farmers Do?

As we look toward the future of agriculture in the United States, it will be important to continue monitoring trends in principal crop acres and the impact of development on farmland. Finding a balance between economic development and preserving agricultural land will be a critical challenge for policymakers and stakeholders in the years to come. Just as importantly, now is the time to think through the implications to you and your community.

  • Is it time to speak to leaders about zoning to protect farmland?

  • How can policy support farmers as the cost to buy land increases and the pressure from developers increases to capitalize on good prices?

  • What is the position of your industry organizations and do they align with your values? How can you motivate them to start taking action on your behalf?

Ultimately, farming is a business—a business centered on community and family. As scarcity brings more constriction, how will you protect your interests and the interests of people inheriting your legacy?

We’re Here to Help!

At Grain Market Insider, our team keeps an eye on the markets and inputs that affect the markets. That includes being on top of industry drivers that impact the market, your operation, and ultimately the price you receive for your hard-earned work. Look to us to help you make the most of your operation.

If you have questions on how we can help, reach out to us at

800.334.9779 or visit us at Grain MarketInsider.com.

Crushing Expectations: The Explosion in Demand for Soybean Oil

ByGrain Market Insider

Have you heard about the anticipated leap in renewable diesel demand? For grain farmers, this is a potential game-changer, as the energy market looks for a significant increase in feedstock (most often soybean oil) to fuel the huge expansion in the renewable diesel market. Are we looking at a permanent price increase for soybeans to meet that continued demand? And does this sentiment remind you, at all, of the ethanol boom? Let’s discuss the sustainability of this increase in demand and what it potentially means to your pocketbook. As with any market opportunity that comes your way, pay attention to what the real possibilities are, the potential risks you face, and strategies to capitalize on the opportunity with an eye to managing risk.

Biodiesel Oil: Fueling the West Coast’s Demand for Lower Emission Energy

As reported in a variety of publications, the U.S. Energy Information Administration (EIA) announced in February that renewable diesel could more than double through 2025. (Renewable diesel is derived from renewable oil sources such as animal fat or corn oil, most often sourced from soybean oil.) These expanded capacity estimates are based on investments in eight new renewable diesel refineries that began production in 2022 and early 2023. EIA estimates could even be an understatement of true anticipated demand. Progressive Farmer cites 17 different new or expanding facilities in an article on November 30, 2022.

This expansion stems from two sources of government intervention. First, aggressive emission reduction targets at the national and state levels (especially in California) are driving the desire to find clean energy alternatives to diesel fuel. At the same time, the Inflation Reduction Act of 2022 extends the biomass-based diesel tax credits throughout 2024.

Renewable Diesel vs. Biodiesel: What’s the Difference?

Unlike biodiesel, renewable diesel is chemically equivalent to petroleum diesel, while generating about 80% fewer greenhouse emissions. Renewable and petroleum diesel can be blended together at any percent (even at 100% renewable diesel) with no significant changes in engine performance. Renewable diesel can also be transported in petroleum diesel pipelines. In contrast, biodiesel must be blended only from 2% to 20% with petroleum diesel.
(Source: U.S. Energy Information Administration)

New Demand in Soybean Oil: Likely Big Impact on U.S. Crop Mix and Price

Industry experts consistently project a significant increase in demand for soybean feedstock to supply renewable energy refineries. For instance, one Progressive Farmer article cites an additional need for 450 million bushels of soybeans over the next several years, while a Farm Progress article cites a projected 600 million increase over 2025/2026. The variability in demand estimates can be attributed to factors such as how quickly production can ramp up and how much demand will actually surge.

Where will that come from? Per the April WASDE numbers, the 2022/2023 U.S. ending stock number for soybeans is 210 million bushels, which is about one half to one third of the new anticipated demand. Meeting this demand in the U.S. will require significant new acreage devoted to soybeans. Consider the incremental 600 million in demand cited by Ed Usset in the previously referenced Farm Progress article. He estimates the U.S. farmer will produce 53 bushels/acre,

and thus would require a conservative 11.3 million of additional acres needed to meet that demand. Per analysis here at TFM (Have Planted Crop Acres Peaked in the U.S.?, May 2023), the U.S. has maxed out arable farmland and is instead facing a retraction in acres over the next 20 years. Rather than expanding into new acres, U.S. farmers will instead need to replace other crops—notably corn, wheat, and cotton—resulting in a shift in acreage to soybeans.

It comes as no surprise, then, that industry experts are anticipating a bump in soybean production and prices for both soybean and corn futures. DTN Lead Analyst Todd Hultman says in Progressive Farmer, “It’s as bullish a change in demand as we’ve seen since the ethanol boom, and it might be even bigger. It’s a net positive for farmers overall.” In terms of prices, he sees the potential for a jump in support from $8 to $12 for soybeans, and $3 to $5 for corn as corn acreage is gobbled up by increased soybean planting.

Thinking about Implications: How Will Market Players React?

The increase in demand is great news for soybean and corn farmers. However, in a free market, any voids or market advantages are inevitably filled by individuals, companies, or countries that want to capitalize on opportunity. We’ve already acknowledged the U.S. is going to be close to maxing out soybean production capacity. Who will capitalize on the ensuing excess opportunity, and will those changes support or decay prices over the long term?

How will Brazil react?

Frankly, the new market expansion will likely accelerate the dominant role of Brazil as a primary supplier of soybeans around the world:

  • Even prior to this anticipated boom, Brazil has outpaced the U.S. in soybean production. According to Brazil’s Ministry of Agriculture, Livestock and Supply in 2021, “Brazilian soybean acreage is expected to grow 27% in the next 10 years, reaching 116 million acres.” (FarmDoc Daily, July 12, 2021).

  • The advantages of Brazil’s real to the U.S. dollar offer every incentive for Brazil to maintain and expand market dominance. From the same FarmDoc Daily article cited above, “Currencies have played an important role in soybean competitiveness in recent years, as the strength of the U.S. dollar has resulted in higher margins in South America. The Brazilian soybean 2020/2021 crop, for example, produced the highest profits in the nation’s history because of low domestic supplies and the depreciation of the Brazilian real relative to the U.S. dollar.”

  • Brazil has the acreage to keep expanding. In 2018, Global Ag Investing estimated that Brazil has 600 million acres of arable land. In contrast, Brazil planted 95 million acres in the 2020/2021 season per FarmDoc Daily, March 30, 2021

All of these factors combined point to increasing expansion in soybeans to meet global demand and a resulting downward pressure on price in the long term. Thus, the bump in prices we expect to see may reduce over time, much like we saw with the ethanol bump.

How will China react?

In the meantime, China has already been busily preparing to weather any market shocks through their continued heavy investment into Brazilian agriculture infrastructure. Their investment allows them to be first in line for soybeans and to limit reliance on U.S. soybean production. Expect continued investment as China continues their strategy to secure their soybean needs.

How will Big Ag react?

The ag industry has already shown that it’s willing to do what it can to capitalize on the renewable diesel expansion.

  • As mentioned, at least 17 new refineries/crush facilities are being built or expanded – including expansion by Cargill and Ag Processing Inc. (API). There are also fears that big facilities will drive smaller facilities (perhaps closer to you) out of business, potentially influencing local basis.

  • There is speculation that the soybean seed producers are looking to develop soybeans that will deliver higher oil output without an impact on protein quality for soymeal. This may lead to a greater demand for specific soybeans, and may affect margin as seed producers charge more for more productive seeds.

  • Soymeal production will flourish as soybean oil leads the crush, leading to lower prices on soymeal in the U.S. and greater export capabilities. This will benefit soymeal consumers, such as beef and dairy farmers.

How will YOU react?

When opportunities like this arise, the most natural thing for anyone to do is to ignore the risk and the planning necessary to truly capitalize on the opportunity. Here are just a few things for you to consider as this market expands:

  • What will your crop mix be over time? How nimble can your operation be in a market that may not be as stable as you’ve known?

  • How much should you expand and/or reinvest to accommodate bigger demands? Should you get more storage? More land? More equipment? And if prices fall off eventually like they did with ethanol, have you built a cost structure that can handle changes in price?

  • Are there basis advantages you should consider? For instance, will it be more lucrative to ship your soybeans to a crushing facility rather than to your local co-op? Will some areas of the country simply have far better basis because of their proximity to crushing facilities, and does it change your planting mix strategy?

  • You can never count on prices to react as you think they should. Are you prepared to manage market risk in a market that may not act in quite the ways you expect as it adjusts a new supply and demand curve?

We’re Here to Help

The world as we know it is changing, whether you take action or not. With the right planning, mindset, and eye toward capitalizing on opportunity while managing risk, you will take the steps necessary to help ensure that you manage your future. At Grain Market Insider, we’ve been around for almost 40 years through market disruptions, both good and bad. Through it all, we’re proud in our work to help our clients prepare and prosper, no matter what the markets may bring.

If you have questions on how we can help, reach out to us at

800.334.9779 or visit us at GrainMarketInsider.com.