By Jon Scheve, Superior Feed Ingredients, LLC
It’s important to remember that recent USDA report was based upon surveys from early June. The USDA said they will resurvey the 14 Midwest corn states and provide an updated planted acre estimate on August 12th. I expect a lot of debates on potential outcomes until then.
Focus on beans
While most people have been discussing corn, I’ve been focused on the bean numbers. The report showed 5 million fewer bean acres planted than previously estimated, which is good for bean prices. This could mean a potential 250 million bushel decrease in carryout next year. 600 million bushels is probably needed, but it’s a great start.
Drop in total acres planted
Friday’s report was based upon numbers from around June 1, when corn was $4.40 and beans were below $9.20. The market was highly incentivizing farmers to plant corn not beans. The report also showed 6 million less acres of total crops being planted for the year than the March planting intentions, so at least some prevent plant acres are likely being considered.
Estimating total planted acres
In 2018 US farmers planted 180 million acres of corn and bean acres. In March the USDA showed that farmers intended to plant almost 179 million acres of both corn and beans. Today the USDA said that total corn and bean plantings would only be 172 million acres of corn and beans. Maybe the USDA actually show us that 7 million acres were likely to be prevent plant at the beginning of the month.
Was the corn market acting tired?
Something that I have noticed and been wondering about is that after crop conditions or planting progress estimates have been released this past month, the corn market hasn’t responded as well as it probably should have. Some say corn should have hit $5 by now, but hasn’t. Perhaps now corn doesn’t need to make it to $5 with what we think we learned.
Rationing corn demand
I’ve heard milling-grade spring wheat is working into central Canada feed rations, instead of corn usually supplied from North Dakota. Also, eastern Canada is importing South American corn because basis is too high in the Eastern U.S. and Canadian markets.
What I’m watching the next two months
I think there is still upside potential left in the market, but I’m cautious. I’ll be watching:
- Summer weather
- Potential frost concerns in September
- Growing degree units
- Export demand
- Eastern Corn Belt ethanol production.
While many farmers tend to watch the first three, many traders are also keeping an eye on the global competition and large world supply. A question that is being asked more and more by traders is if ethanol plants will continue to run if there isn’t enough corn in all areas of the corn belt following this upcoming harvest.
Should prices go higher?
It’s impossible to know the answer to that because we are faced with the worst planting conditions in history and no one knows the full impact yet. However, there are factors pushing back. The market has already rationed a lot of demand and the final 2018 carryout could still be the highest in 30 years.
I traveled I-35 from Minneapolis to Des Moines, then I-80 west to Lincoln before turning south to just north of the Nebraska/Kansas border. I was expecting to see a lot of fields not planted, but I actually only counted 15 unplanted fields, and five of those were within 50 miles south of Lincoln. Roughly 90% of the corn looked to be within the good/excellent category. While the corn north of Ames, Iowa was a few weeks behind, it looked better than I expected. My final 50-mile drive south of Lincoln saw the corn as uneven and didn’t look quite as good as what I saw across Iowa.
Throughout the trip, beans looked good, but were short. They were either popping out of the ground or maybe up to just 6 inches tall.
After 18+ months of a prolonged sideways market at unprofitable prices, my marketing plan was set up with trades to take advantage of opportunity assuming prices may not rally at all, and if they did, it would be for a very limited time and limited amount.
This recent rally took most everyone by surprise, including me. U.S. planting progress has never been delayed this long for such a widespread area. And, like everyone else, I’ve needed to make some adjustments to my marketing plan along the way. But, before the full extent of the recent rally was realized, I had several trades in place that would make me profitable if the market remained sideways and even allow me to manufacture profitable prices, even if the market rallied just a little.
As you’ll see, in hindsight I shouldn’t have placed the three trades below. However, in times like these, it’s important to remember the three strategies I maintain in my marketing plans.
- I don’t bet on unexpected or unlikely events to be profitable. Instead I plan for normal conditions every year. While I won’t be right every year with this strategy, and clearly this year was one of them, I will be more profitable in the long-run planning for the average year. Plus, this strategy still reduces my farm operation’s overall risk.
- I place a combination of trades that are profitable if the market goes up, down or sideways, because the market always has a 33% chance to do any one of these scenarios. Betting on only the market rallying, increases my risk when the market goes down or sideways. For months the market moved nowhere and my most profitable trades were ones that did best in sideways markets. Now with the recent rally, these trades as you’ll see below, aren’t the most profitable solution.
- I never place a trade unless I’m comfortable with any outcome. When I placed all these trades, I knew I was limiting my upside potential, but at the time a significant rally seemed really unlikely.
Still I think it’s important to be fully transparent with all trades I do, even the less successful ones. While I’m always disappointed when a trade doesn’t work out like I thought it would, there’s still a lot I can learn when I review the results. It’s impossible for anyone to sell all of their grain at the top of the market every year. So, I’m going to learn what I can with each trade, and move on to the next one. After all, I always have more grain to sell.
No. 1 Sold Straddle
On 4/23/19 when July corn was around $3.60, I sold a July $3.60 straddle (selling both a put and call) and bought a $3.40 put while collecting 18 cents total on 10% of my 2019 production.
What does this mean?
- If July corn is $3.60 on 6/21/19, I keep all of the 18 cents
- For every penny corn is below $3.60 I get less premium penny for penny until $3.42.
- For every penny higher than $3.60 I get less premium penny for penny until $3.78.
- At $3.78 or higher I have to make a corn sale at $3.60 against July futures, but I still get to keep the 18 cents, so it’s like selling $3.78.
- At $3.42 or lower I have to take a max loss on this trade of only 2 cents because I own the $3.40 put as protection. So even if the futures continue to go lower, I won’t lose any more money.
My trade thoughts and rationale when placing the straddle on 4/23/19
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 10% of my production above $3.78 because I can then “roll” the sale from a July futures to a December futures and likely pick up more than 20 cents in carry and manufacture a trade close to $4 on Dec corn.
The last 7 weeks has been a roller coaster ride. Three weeks after making the trade, July corn was trading so low it seemed like I would likely lose 2 cents. Two weeks later, July corn was trading at the top-side of the trade range, and I thought I would be happy I made the trade. Last week the trade expired and July futures were higher than anyone ever thought was possible when I put this trade on.
What did you do next?
With this trade I was short the July contract, which expires soon, so I needed to roll it forward to another contract month. With high demand in the eastern corn belt, basis values have increased, which has narrowed the spreads between July ’19 and December ‘19 futures. Normally I would only roll my sales to the Dec futures, but this year is far from normal.
Using history as a guide I looked at the 2012 crop when the U.S. was experiencing a supply disruption. During that marketing year the spread between the December after harvest and the July the summer after the harvest went into an inverse where December was trading higher than the following July. That means that it would actually cost me to store grain in the bin waiting for a higher basis after harvest. I felt that it could happen again this year. So I thought I should move my sales now to July of ’20 and look for an inverse where I can move the futures back to an earlier futures month and capture the inverse if one begins to form or I can wait longer for higher basis values next summer and not worry about it costing me to do that.
Thus, I “rolled” my sales against the July ‘19 to July ’20 and captured 18 cents of market carry. This means the trade above increased from $3.78 against the July ’19 to now being $3.96 against the July ’20.
No. 2 Straddle Trade
On 5/16/19 when July was around $3.80, I sold a July $3.80 straddle (selling both a put and call) and bought a $3.60 put while collecting 23 cents total on 10% of my 2019 production.
What does this mean?
If July corn is $3.80 on 6/21/19, I keep all of the 23 cents
- For every penny corn is below $3.80 I get less premium penny for penny until $3.60.
- For every penny higher than $3.80 I get less premium penny for penny until $4.03.
- At $4.03 or higher I have to make a corn sale at $3.80 against July futures, but I still get to keep the 23 cents, so it’s like selling $4.03.
- At $3.60 or lower I collect at least 3 on this trade cents because I own the $3.60 put as protection. So even if the futures continue to go lower, I won’t lose any money on this trade.
My trade thoughts and rationale when placing the straddle on 5/16/19
The market has rallied 38 cents off the lows, so I want to reward that move and make another potential sale. After the 18+ months of a sideways market at unprofitable levels, and with what I know today, I’d be happy selling 10% of my production above $4. Plus, I’ll likely be able to “roll” this sale from July ‘19 futures to December ’19 and pick up an additional 20 cents of market carry, potentially manufacturing a trade close to $4.25 on December corn.
Similar to the trade above, prices went much higher than anyone thought they could. I also rolled this sale to the July ’20 and captured 18 cents of carry, ending up with $4.21 against the July ’20.
No. 3 Futures sale
After the July futures rallied to $3.96 on 5/21/19, I let an order I placed several months ago hit on 10% of my production. I thought corn’s massive carryout would mean the carry from the July ’19 to the Dec ’19 would be at least 20 cents, giving me a $4.15 sale price on the December ‘19.
At the time this trade looked like the correct decision because I was rewarding another 20-cent rally in the market with a sale, but with the benefit of hindsight I should have pulled the order. I rolled this sale to the July ’20 and collected 18 cents of market carry, making this a sale worth $4.14.
No. 4 Spread trade
I also rolled a Dec ’19 futures sale, placed on 3/13/18 at $4.18 on 10% of my production, to the July ’20 and collected 10 cents of carry profit. This sale is now worth $4.28 against the July ’20.
My overall positions and looking forward
The sales above represent 40% of my 2019 production at an average price of $4.15 against the July ’20. It’s hard to believe three months ago I would have been thrilled with this price, and now I’m disappointed.
After Friday’s report, like most farmers, I’m not sure what to expect from this market. The report showed more planted acres than I expected, and growing conditions in the eastern Corn Belt are questionable.
When rare events in the market happen like this, it’s difficult to know what to do next. For me, it’s important to keep using the strategies that have kept me profitable the past 10 years. I can’t hit the high every year. My goal is to take the peaks and valleys out of the market and be left with a profit in each marketing year. Over time, I will be ahead.
Please email firstname.lastname@example.org 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.
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