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Buying puts

By Jon Scheve, Superior Feed Ingredients, LLC

Arguably the Aug. 10 USDA report is the biggest of the year because it provides the first estimated yields for the upcoming harvest. With population estimated counts the highest ever, and ear weight estimates lower than the past two years but still on the high side, the USDA is predicting a 178.4 average national yield.

The weather throughout the growing season has been very good for a large percentage of the Corn Belt to this point. Even if there is widespread dry weather throughout the Midwest during the last half of August, I’m not sure how much of a negative impact there would be on yields. On the other hand, I think some timely rains could still have a positive impact on yields going into harvest.

That being said, I’m not bearish corn long-term. Even if national yields would climb another 3 bushels per acre, next year’s carryout would still be lower than this year. Plus, corn demand estimates have been increasing too. As along as the expected demand is maintained, I think there is upside potential for corn after the harvest is complete. The upside in the corn market would be magnified if the national yield were to drop going into the end of the year.

Bean yield estimates also increased. Demand for old crop was increased as well with this report but with the ongoing trade issues the export demand picture for beans doesn’t look great. To keep bean prices from sliding further, we’ll need either hot and dry weather for the next month or Chinese trade issues will need to be resolved. Even if current yield estimates are accurate and the trade issues were resolved overnight, prices over $10 may prove to be difficult.

Long-time followers know I’m usually not a fan of buying puts. I just don’t like putting protections in place well below wherever current prices may happen to be. If I’m concerned prices are going lower, it usually makes more sense for me to just sell, instead of paying money for protection and the right of hoping for a rally.

Sill, sometimes you have to break your own rules. I was worried corn yield estimates on the August report could exceed market estimates. So on 7/31/18 when Sep corn futures were $3.70, I did the following 2 trades at the same time:

  • I bought Sep $3.60 puts to cover 50% of my 2018 production for 4 cents
  • I sold a March $3.90 call for 24.5 cents on 10% of my 2018 production.
  • Basically, I bought 5 – Sep puts for every 1 – March call I sold.

After commissions, I was able to net just over a 1 cent premium between the 2 trades.


What Does This Mean?

These trades, along with all of my other positions already in place provide me with good protection for any outcome of the August USDA report.

  • With a Bullish Report – I only have to sell 10% of my production for slightly below $4 pending where prices are in late February.
  • Under a Bearish Report – I’m protected at only 10 cents below what the market was trading for the day I made the trade until August 24th two weeks after the report.
  • In a Sideways Report – All of my other trades that I have already working likely would put additional money in my “pot of premium” to add to my sales prices later.
  • There is a chance that both trades could actually get hit. Prices could tumble in the next 2 weeks and I could have the puts make money or get exercised and then after harvest the market could rally high enough that my March calls also get exercised. Before the report and now after, I would be happy with that outcome knowing what I know today.

Why Did You Place These Trades?

I wanted some protection in place if there was a corn market free-fall through August after the USDA report. On 7/31, much of the data I was looking at indicated yields could be higher than the trade was expecting. Plus, for the last few years corn’s low for the year has been around the end of August.

If the USDA would stun the trade with lower than predicted yields, this trade would only cap me at having to sell grain at $3.90 on March futures.

If the USDA provided a neutral report, corn prices would likely remain sideways for the next few weeks. I have several trades in place already that would allow me to capitalize on this market situation. So in my mind I didn’t really see any downside to the outcome of the report.

After placing the trades above and before the report, several farmers asked me what I wanted the report to say. I told them it didn’t really matter, because I had safeguards and opportunities put into place for all possible scenarios, so I would be comfortable with any outcome. And generally, that’s my preferred approach to my grain marketing strategy. Like all farmers I want prices to rally obviously, but I’m also prepared if prices don’t rally and am comfortable with that outcome too.


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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