Marketing to manage risk

With good weather forecasted for the week, corn planting started across the Midwest. I anticipate a high percent of corn acres will be planted this week.  Early planting like this is not bullish because it usually leads to higher yield potential.

Beans continue to rally due to inflation worries in the macro economy.  Strength of the Brazilian Real verses the Dollar may lead to better export potential from the U.S.  Also, early corn planting indicates that not as many corn acres will be switched to beans as estimated.

Fundamentally this bean rally seems a bit overdone. Technically, the market could continue to rally. However, some say this rally put a weather premium back into the market. Beans may be in for a wild ride, prices could range from $7.50 to $11 depending acres and yields this summer.

Over the last few weeks there have been countless corn and soybean predictions.  Corn estimates ranging from less than $3 to over $6 causes sensational headlines, but doesn’t help producers make decisions. Until harvest, weather will mostly be driving the market.  It’s important to keep in mind that opportunities will become available for farmers, but only those with a plan will capture them.

Market Action

Last week, a long standing order I had placed was filled at $9.60 on the Nov soybeans, putting me at 60% priced for my 2016 production.

Position

Months ago my goal was to be 66% priced by the start of planting for corn. Right now I am 30% covered with futures and 40% covered through sold calls. Selling calls doesn’t provide downside protection, but I do collect a premium upfront.  Several of these trades have expired worthless recently, but each time the unsold bushels were replaced with another sold call position, with more premium in my pocket.

With so many open options, what is my real position?

This is hard to answer, because no one know where the market will be months from now. A drought may push prices higher. Great weather may push prices lower. My position varies based upon future prices, but protections are in place so I won’t hit the bottom price, but I won’t be hitting the top either.

The table below shows potential Dec futures prices at Thanksgiving. I’ve included the % of my position sold at those prices and the average price sold at each. I also included “100% priced” which means taking the unpriced bushels at each point and selling at that price to understand overall position.

 

IF – Dec Futures

% Sold

Price

If 100% priced

$3.00

50%

3.95

3.50

$3.20

50%

4.05

3.65

$3.40

50%

4.10

3.75

$3.60

50%

4.15

3.90

$3.80

55%

4.19

4.05

$4.00

60%

4.23

4.15

$4.20

60%

4.28

4.25

$4.40

65%

4.32

4.35

$4.60

65%

4.33

4.40

$4.80

70%

4.35

4.45

$5.00

70%

4.35

4.50

 

What is the take away from this?

Having a plan in place is more important than the prices I pick. At $4 my average sold price is $4.23 on what I have sold, but only drops 20 cents if the market falls a $1 per bushel. On the flip side, my price doesn’t increase much if the market rallies to $5.

It’s important to note, this plan was slow to develop. I didn’t just put it on in the last month. It includes 15 different options trades and 9 futures trades.  While most of the trades happened in the last 8 months, they go as far back as 3/3/13.

It may take time to put these trades together, but it’s worth it to minimize risk for our farm operation.  I feel comfortable with my positions knowing what I know now.  While I won’t get to take advantage of $5 corn on 100% of my corn if prices go up in the future, I’m relieved that I won’t have to settle for $3 corn if the market goes down.

 

Jon grew up raising corn and soybeans on a farm near Beatrice, NE. Upon graduation from The University of Nebraska in Lincoln, he became a grain merchandiser and has been trading corn, soybeans and other grains for the last 18 years, building relationships with end-users in the process. After successfully marketing his father’s grain and getting his MBA, 10 years ago he started helping farmer clients market their grain based upon his principals of farmer education, reducing risk, understanding storage potential and using basis strategy to maximize individual farm operation profits. A big believer in farmer education of futures trading, Jon writes a weekly commentary to farmers interested in learning more and growing their farm operations.

Trading of futures, options, swaps and other derivatives is risky and is not suitable for all persons. All of these investment products are leveraged, and you can lose more than your initial deposit. Each investment product is offered only to and from jurisdictions where solicitation and sale are lawful, and in accordance with applicable laws and regulations in such jurisdiction. The information provided here should not be relied upon as a substitute for independent research before making your investment decisions. Superior Feed Ingredients, LLC is merely providing this information for your general information and the information does not take into account any particular individual’s investment objectives, financial situation, or needs. All investors should obtain advice based on their unique situation before making any investment decision. The contents of this communication and any attachments are for informational purposes only and under no circumstances should they be construed as an offer to buy or sell, or a solicitation to buy or sell any future, option, swap or other derivative. The sources for the information and any opinions in this communication are believed to be reliable, but Superior Feed Ingredients, LLC does not warrant or guarantee the accuracy of such information or opinions. Superior Feed Ingredients, LLC and its principals and employees may take positions different from any positions described in this communication. Past results are not necessarily indicative of future results. He can be contacted at jon@superiorfeed.com.

 

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