By Jon Scheve, Superior Feed Ingredients, LLC
It would seem that the market hasn’t really reacted to the massive flooding throughout the Midwest. This is likely because the amount grain affected, currently estimated at $500 million in Nebraska alone, is relatively small. While that sounds large, the total U.S. corn crop is valued at about $60 billion and the bean crop at $40 billion. So, losses may only total about 1% of the crop across the entire Midwest.
About 13% of ethanol production was estimated to have been halted last week. But that demand is small, 2 million bushels per day, relative to the estimates of what have been lost so far of maybe 250 million bushels of corn. However, if those plants stay off line for more than a couple months then the issue could become a bigger problem. Unfortunately, that lack of demand can’t be made up. It’s lost forever because most plants were running at near full capacity.
The long-term issue from the flooding may be that fewer acres of corn are planted this spring. This issue will be debated until late June. While there may be some prevent plant acres, there is still time for a lot of acres to dry out before planting. Spring weather will dictate this outcome over the next 60 days.
China bought 12 million bushels of corn last week. While this isn’t bearish news, it will take many more purchases for the market to get excited. After all, just 2 weeks ago the USDA suggested the export pace would slow by 75 million bushels this year. It would seem unlikely China would continue to buy substantial U.S. corn when Brazil and Argentina’s harvest will be in full swing next month and priced to move because of limited storage in the southern hemisphere. However, a trade deal could force their hands, if we ever make one.
Corn bounced off of a recent low this week, indicating end users may have found a level they are willing to buy. Plus, funds seem less likely to continue shorting the market and may even be covering some of their recent sales back in as we enter the beginning of another growing cycle. Farmers weren’t selling at the bottom, but did show a little interest during this week’s rally.
During this ongoing sideways market below breakeven, I continue to sell calls and straddles to pick up premium on my unsold ’18 corn, so I can eventually try and manufacture profitable prices. Following is this week’s trade results.
On 2/22/19 when May corn was around $3.85, I sold an April $3.80 straddle (selling both a put and call) and collected just over 12 cents total on 20% of my 2018 production.
What does this mean?
- If May corn is $3.80 on 3/22/19, I keep all of the 12 cents.
- For every penny corn is below $3.80 I get less premium penny for penny until $3.68.
- For every penny higher than $3.80 I get less premium penny for penny until $3.92.
- At $3.92 or higher I have to make a corn sale at $3.80 against May futures, but I still get to keep the 12 cents, so it’s like selling $3.92.
- At $3.68 or lower I have to take a loss on this trade penny for penny below $3.68.
My trade thoughts and rationale when placing the straddle on 2/22/19
This trade is most profitable in a sideways market, which I think is the most likely scenario right now. If prices don’t rally, I can use this premium to help push a final sale to profitable levels. If the market rallies, I’m happy selling 20% of my production above $3.90.
It’s been a roller coaster ride for corn the last 4 weeks.
- 1st 2 weeks — market fell 25 cents
- 3rd week — market rallied 10 cents
- 4th week — market rallied another 10 cents.
On Friday morning when May futures hit $3.80, I bought back both sides of the straddle for 2 cents. After commissions, I made 8 cents profit on this trade (12 cents collected – 2 cents to buy it back and – 2 cents in commissions).
I could have just sold corn at this point, and I would have got more versus just selling outright a month earlier when I placed the straddle trade. Corn closed Friday at $3.78 + .08 options premium = $3.86 vs. $3.85 when I placed the straddle trade. I didn’t sell corn Friday because I think there is still upside potential and instead, I repeated this type of trade as well as added another (see below).
New corn trades
New trade – Sold call:
On 3/22/19 when May corn was at $3.80, I sold a May $3.80 call for 8 cents – expiring 4/26/19 on 10% of my ’18 production.
What does that mean?
- If corn is trading below the strike price when this option expires I keep the 8-cent premium and add it to another trade later.
- If corn is trading above the strike price when this option expires I have to sell corn for the strike price of $3.80 PLUS I keep the premium. This means a price of $3.88 on May futures.
My trade thoughts and rationale on 3/22/19
Since I still need to sell some of my remaining ’18 corn, but I don’t want to sell $3.80 May futures, this trade allows me to try and get higher values than are available today or even a month ago. If the market stays sideways, I keep the 8-cent premium. There isn’t downside protection with this trade, but that isn’t the goal for this trade.
New trade – Sold straddle
On 3/18/19 when May corn was around $3.71, I sold a May $3.80 straddle (selling both a put and call) and collected 19 cents total on 20% of my 2018 production.
What does this mean?
- If May corn is $3.80 on 4/26/19, I keep all of the 19 cents
- For every penny corn is below $3.80 I get less premium penny for penny until $3.61.
- For every penny higher than $3.80 I get less premium penny for penny until $3.99.
- At $3.99 or higher I have to make a corn sale at $3.80 against May futures, but I still get to keep the 19 cents, so it’s like selling $3.99
- At $3.61 or lower I have to take a loss on this trade penny for penny below $3.61.
My trade thoughts and rationale when placing the straddle on 3/18/19
As always, a straddle trade is most profitable if the market stays sideways. During the market setback over the last few weeks I’ve felt the market is valued too low. I was able to place this exact same trade a month ago at the same price, so repeating it again made sense to me. Similar to the April straddle trade, I don’t expect to make a lot on this trade, but I expect I’m unlikely to lose much on it also.
When placing straddles, I’m not worried if the market rallies, because that forces me to sell at a price, I’m comfortable with selling. In this case, I’ll be happy selling another 20% of my production for $3.99. My fear with a straddle trade is always that the market will go lower.
What my ’18 corn position could be in 5 weeks
Now, 40% of my production is covered with sold calls or sold straddles. If I include the profit from the April straddle trade that expired today, these new trades would allow me to sell the equivalent of $4 against May futures if the corn board is anywhere above $3.80 on 4/26/19. I’ve limited my upside potential if there is a huge rally in the next month, but given the last 8 months, I would be very happy to get $4 on most of my remaining ’18 corn. Even if the market rallies significantly, I can still take advantage with sales on my ’19 unsold corn production.
What if corn is below $3.80?
I’ll still collect some premium on the 40% of my production until the price hits about $3.60. With the April straddle profit, if corn on 4/26/19 is:
- At $3.75 I can collect an average options premium of 15 cents or I can sell what is the equivalent of $3.90
- At $3.70 I can collect an average options premium of 12 cents or I can sell what is the equivalent of $3.82
- At $3.65 I can collect an average options premium of 9 cents or I can sell what is the equivalent of $3.74.
What if corn is below $3.60?
I would be frustrated like all other farmers as I won’t have any additional grain sold. I would also lose penny for penny on 30% of ’18 production from $3.60 and lower on this trade. While I’ve been picking up premium every month since last August selling calls and straddles to offset a drop like this, if the price is $3.60 on 4/26, I am chipping away at profits I have been making on previous trades.
Historically corn prices are in an upward trend until early summer, but that doesn’t mean it can’t or won’t go down. There are still a lot of unknowns:
- How many planted acres will the USDA estimate on March 29?
- What will the planting pace be like this year in Mid-April?
- How could global corn demand be affected by the spread of African Swine Fever?
- Is a trade resolution with China completed in the next month and what does it look like?
- Do the funds continue to buy back their short position or add to it?
While I’m doing what I think is right for my farm operation, there isn’t a perfect trade out there. I make the best decision with the information that is available to me, while trying to limit the risk exposure to my farm operation. That being said, it will be a long 5 weeks until I see what happens and I might have to make some adjustments if new information becomes available.
Please email email@example.com with any questions or to learn more. 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.