The following commentary does not necessarily reflect the views of AgWeb or Farm Journal Media. The opinions expressed below are the author's own.
The following commentary does not necessarily reflect the views of AgWeb or Farm Journal Media. The opinions expressed below are the author's own.
As a farmer and grain marketer Jon provides a practical grain marketing education to farmers. Jon explains how to reduce risk while maximizing profits using storage, market carry and basis. Often real-life trade detail is provided to illustrate unique ways farmers can market their grain in uncertain and volatile markets.
Market Commentary for 3/9/18
With corn planting starting in about 30 days, the western corn belt is currently dry and the east is extremely wet. Combined with the dryness in South America, the market is noticing these less than ideal conditions and making adjustments.
Two months ago farmers were hoping for a 20 cent rally to sell some corn. Now after a 30 cent rally, many continue to hold on thinking there is more upside potential. Basis values are slightly off their highs, but considering the large futures run up, not as much as I would have expected. This is likely a sign of farmers not selling.
This week's USDA report indicated an increase in corn exports, which is helping to reduce the massive supply from the last few years. Corn may have finally turned a corner as summer approaches. Now the market will wait to focus on the end of March report concerning planting intentions.
Market Action
Straddles & Calls
On 2/23/18 several of my options strategies expired. Following shows why I placed the trades at the time as well as the results.
On 8/30/17 I sold a March $3.70 straddle for 38 cents (I sold the $3.70 put and the $3.70 call and collected a total of 38 cents) - 10% production
On 12/4/17 when March corn traded at $3.55 I sold a March $3.60 call for 10 cents on 20% of my ’17 production
What Happened?
On 2/23/18 corn closed at $3.67 on March futures. I let all of the options get exercised, the following details the results:
What Does This Mean?
Between the 2 trades above I ended up selling an additional 10% of my 2017 production for $4.08 against March futures ($3.60 sold futures 10 cents of call premium 38 cents of straddle premium).
Having the final day of trading price land between $3.60 and $3.70, resulted in the best possible outcome for these two trades. Plus, it allowed me to sell another 10% of my corn for $4.08.
Collecting Market Carry
On 2/27/18, the last trading day for March futures, I picked up an additional 8.75 cents of market carry premium by buying back the net short futures and selling May futures at the same time (i.e. "rolling" my position forward). So, now my sale above is worth $4.15 against May futures after commissions.
I also rolled all of my previous sales for my 2017 crop from the March futures to May and collected 8.75 cents of market carry there too. After accounting for these additional sales. and all the others I have made to this point, I’m approximately 30-35% done with my 2017 crop.
Selling Options As Part Of A Marketing Strategy
I hear some analysts scare farmers out of selling options with nightmare scenarios of unlimited potential loss. While I disagree with generalizations and fear tactics when it comes to marketing strategy education, I understand why they are usually so opposed to it. It really comes down to more of a narrowed focus of their "point of view" that keeps them from fully embracing alternative marketing strategies when goals are not fully aligned. Or in other words....it's because of the differing viewpoints of speculators and farmers.
In all fairness, I doubt that speculators fully understand how I, as a farmer, do my trades. As a farmer, I can profit from these types of trades because I have flexibility that speculators do not.....I have unpriced grain stored at home and know more will be grown next year. Because I also have sales on for the current crop, as well as next year’s crop, I can back up any potential purchases or additional sales from selling straddles or call options if the market moves higher or lower.
Speculators, on the other hand, don't usually have any physical grain on hand. If I was them, and did these type of trades without having some grain sold and/or more unpriced grain available to back the trades up, I would have unlimited risk too and I would not consider selling options either.
While I'm a fan of selling options because it allows me to take advantage of profitable opportunities that can be available in the market, farmers still need to be smart about it.
It's tough for farmers to be profitable at any time, but especially right now. That's why being open to alternative marketing strategies that take advantage of the inherent flexibilities farmers have, can help one be more profitable year after year.
Jon Scheve
Superior Feed Ingredients, LLC
9358 Oak Ave
Waconia, MN 55387
Tel: 952-442-2380
Cell: 402-681-4867
Fax: 952-442-4945
This email material is for the sole use of the intended recipient, and cannot be reproduced, disseminated, distributed or electronically transmitted, including any attachments, without the prior written permission of Superior Feed Ingredients, LLC.. Even though the information contained herein is believed to be reliable, we cannot guarantee its accuracy or completeness, and the views and opinions expressed are subject to change without notice. Trading commodities involves risk and one should fully understand those risks before buying or selling futures or options. This data is provided for information purposes only and is not intended to be used for specific trading strategies.
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