Hurt said farmers with forward contract have three options:
- If the grain was sold locally, the farmer now may be able to buy back some of the bushels by paying the difference for the lost bushels. He said, “They would avoid further potential losses if prices move even higher.”
- A second option is to buy futures to offset the price impact. He says, “If prices go higher they could gain on their futures position and those gains could help offset losses on their cash-forward contract.”
- A third venue is to buy a call option that would create the chance to buy bushels for a specific price by a specific date. He added, “The farmer would have to pay a premium for those rights but would have price protection against rising prices.”
- Hurt also said if you have stored grain from the 2011 crop, its value is climbing, and could be used for delivery against the contract. He said there is a bullish situation if the drought continues, but if it rains, that could change.
As the drought continues the reality of fewer bushels converts to farm revenue, which will vary from farm to farm, depending on a wide variety of dynamics. While moderate and medium droughts will reduce income, a severe drought will create significant revenue problems, unless one has revenue insurance, and then it might be a significant windfall with both indemnity payments and high prices for the few bushels for sale. Some additional problems could result if there were many bushels forward contracted or hedged early in the year, and could not be fulfilled by a short crop. Options to resolve that could involve arrangements with elevator managers, buying futures that are expected to climb, or buying a call option to purchase corn at a price that might be under the market as it rises past the strike price.