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Selling in a sideways market

By Jon Scheve, Superior Feed Ingredients, LLC

Argentina corn is cheaper than U.S. corn because the South American corn crop conditions are above normal. Because it’s difficult to store grain in the southern hemisphere, it’s priced to move. Wheat pulled back as well and some see wheat working into feed rations at the displacement of corn.

Winter doesn’t seem to want to end in the U.S. Currently in Minneapolis there is 3 feet of snow on the ground and it’s not expected to be above 30 degrees for another 10 days from here to Des Moines. Usually the snow is starting to melt in Minnesota by the end of March. The prolonged winter and likely flooding in northern parts of the Corn Belt is concerning some.

There are farmers who are also worried about the limited time they had for fall field work and fertilizer application. While it’s still unknown if planting will be significantly delayed, it is highly unlikely at this point to start early.

Farmers aren’t selling corn at current levels. Even with basis increases across the U.S., end users are struggling to get enough corn.

After visiting with farmers in the eastern Corn Belt last week, most say they will be keeping rotations the same. Only a few said they plan to plant more corn than the usual rotation and very few are planting more beans. Still, we’ll have to wait for the March 29 USDA report for an estimate on the acres switching to corn, and then the June report for a more accurate account of what actually gets planted.

Like many farmers, I still have more 2018 corn to sell. With this relentless sideways market at low prices, and recent success generating added premium with straddle trades, I placed two more straddles this week. Following details why I made the trades and all of the possible outcomes.

 

Trade 1 — Straddle trade

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.

 

Trade 2 – Straddle trade

On 2/22/19 when May corn was around $3.85, I sold a May $3.80 straddle (selling both a put and call) and collected just over 19 cents total on 10% 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 $3.68.

 

My trade thoughts and rationale when placing both straddles On 2/22/19

These trades are 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 30% of my production above $3.90.

In the past 7 out of the last 11 years corn didn’t trade lower in late March or April versus February, so I think a big price drop is unlikely. Plus, carryout is the tightest since recent drought years. The 4 years where the market was lower were the springs times that followed the ’16, ’14, ’12 and ’09 harvests. All but 2012 were in years where the carryout was increasing from the year before it.

In the end, if the market stays sideways, I collect more money than doing nothing or even making a sale today.

 

Thoughts 1 week later On 3/1/19

The 15-cent market drop was surprising this week. Corn is now trading at the bottom of the last 3 month’s trading range. Some expect U.S. exports to shrink from the anticipated large South American corn harvest, which would put downward pressure on prices. But will the U.S. farmer plant enough corn this spring? Will farmers sell at these depressed prices before they have even put a seed in the ground? I still have 3 more weeks before the first trade expires.

 

Please email jon@superiorfeed.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.

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