The following commentary does not necessarily reflect the views of AgWeb or Farm Journal Media. The opinions expressed below are the author's own.
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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.
To get my enewsletter sent directly to you every week, send me an email: jon@superiorfeed.com
Market Commentary for 8/24/18
Wheat values dropped 40 cents last week, the biggest weekly decrease in 2 years. Wheat had been pulling up corn prices some, so this probably contributed to corn prices being down another 20 cents this week. While this is disappointing, both of these crops still have upside potential after the new year due to dry weather outside of the US. Global buyers may need to come shopping for US grain eventually.
Historically corn prices decrease during the last week of August, because many end users set Aug 30th as the final day to price any deferred-priced (DP) grain in storage and farmers with these type of positions tend to wait until the last possible moment for a rally.
With no resolution to the trade war this week and an expected record soybean crop, soybean futures also lost some ground. Add to that, soybean basis bids (cash bids) are at the lowest levels in many years, I actually think futures are holding well. Futures may eventually drop even further trying to eclipse the value of the Chinese tariffs and be on par with Brazilian bean prices. Without a change in basis levels or the trade dispute there seems to be little hope for a sustained futures rally.
Market Action - September Trade Results - How Did I Do
Marketing Strategy Approach
I try to maintain a flexible marketing strategy that maximizes profit potential and minimizes risk. This means that some of my trades are most profitable if the market stays sideways, especially if there is a lot of rationale for minimal price movement in the short or long-term. Like all farmers, I'm most profitable if the market rallies above breakeven price points, and I always want that to happen. Unfortunately, there can be long periods of time where the market doesn't rally above breakeven points (i.e. 2017). That's why being open to alternative trade opportunities can be beneficial. I have several trades below that when combined together show profit potential from a market move in any direction . Still, while I'm open to alternative solutions, for each trade I must fully understand any potential outcome and be willing to accept any result.
6 Trades and the Final Results Summary
These trades were put on at varying times between March and July during different market factors. Rationale and though processes used in late spring were much different from late July.
The 6 trades detailed below allowed for me to stay flexible with multiple market price points depending on where the market was in late August. Ultimately, these 6 trades when combined allowed me to sell 50% of my '17 production for $3.68, which was about 20 cents higher than where the market closed on Friday.
I believe in being fully transparent with my trade outcomes, which I think provides a better foundation for understanding and considering alternative opportunities. Still, the amount of detail can be overwhelming for those just wanting an overview. For those wanting a more summarized approach, just read the sections titled "My Trade Thoughts" and "Final Results."
Trade #1 – Sold Call
On 6/18/18 when Sep corn was near $3.65 I sold the following call:
My Trade Thoughts And Rationale On 6/18/18
Since I still need to sell some of my remaining '17 corn, but I don’t want to sell $3.65 Sep futures, this trade allows me to get values close to $4 if there is a rally. If the market stays sideways, I keep the 9 cent premiums. There isn’t a downside protection with these trades, but that isn't the goal for this trade.
Final Results
Corn closed below $3.95, so I kept the 9 cent premium to add to my "pot of premium" I've been collecting all year.
Trade #2 – Sold Call
On 7/19/18 when Sep corn was near $3.51 I sold the following call:
My Trade Thoughts And Rationale from 7/19/18
Since I still needed to sell some of my remaining '17 corn, but I don’t want to sell $3.50 Sep futures, this trade allows me to get a slightly higher value. If the market stays sideways, I keep the 10 cent premiums. There isn’t a downside protection with these trades, but that isn't the goal for this trade.
Final Results
Corn was below $3.50 at expiration so I kept the 10 cent premium.
Trade #3 – Sold Straddle
On 7/18/18 when Sep corn was around $3.48, I sold an Sep $3.45 straddle (selling both a put and call) and bought a $3.30 Sep put, collecting 15 cents total on 10% of my 2017 production.
What Does This Mean?
My Trade Thoughts And Rationale from 7/18/18
This trade is most profitable in a sideways market. With the current good weather forecasts, I'd be happy collecting the premium to add to another opportunity later. However, if the market drops significantly I'm also protected from losing money or having to buy corn back with this trade. With what I know today, I would prefer that the market would rally and I'll be very happy with a $3.60 sold price because I have a lot of different trades already working that need prices to be above $3.60. I'm comfortable with any market outcome with this trade.
Final Results
Corn was trading $3.49 one hour before expiration, so I bought back the $3.45 call for 5 cents (including commissions). The rest of the trade expired worthless. Final result - I received 10 cent premium to add to my "pot of "premium" for the year.
Trade #4 - Sold Straddle
On 4/17/18 with Sep corn around $4, I sold a Sep $4 straddle (selling both a put and call) and bought a $3.60 Sep put, collecting 41 cents total on 10% of my 2017 production.
What Does This Mean?
My Trade Thoughts And Rationale from 4/17/18
This trade is most profitable in a sideways market, but I'm also protected from losing money, or buying corn back, if the market drops significantly. I'll be happy with a $4.41 sold price, if the market rallies. But, if the market stays sideways, I'll be just as happy collecting the premium and adding it to a later opportunity.
Final Results
This trade was about a wash, I made and lost nothing. In reviewing my rationale for the trade, it’s clear in mid-April I didn't expect prices to fall so much. I was more worried about upside limits than downside risk. While I didn't lose anything on this trade, with hindsight I should have just sold corn on 4/17/18, instead of trying to get more.
Trade #5 – Sold Straddle
On 3/20/18 when Sep corn was around $3.90 I bought a Sep $3.80 straddle (sold both the $3.80 put and $3.80 call) and bought a $3.60 put. I collected 34 cents of premium and I placed about 10% of my ’17 production in this trade. The trade expires at the end of August.
My Trade Thoughts And Rationale from 4/17/18
This trade is most advantageous if the market remains steady or higher. Even if the market drops, I’m guaranteed to not lose any money from the options.
Final Results
The market peaked in May and finished under $3.60. I collected 14 cents to add to my "pot of premium" for the year.
Trade #6 - Sold Call & Bought Puts
On 7/31/18 when Sep corn futures were $3.70, I did the following 2 trades at the same time:
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.
Final Results
Sep corn futures were below $3.60, so I let these options get exercised on 50% of my '17 production. Also, the March option could still get exercised if corn rallies in late winter. With the March futures 15 cents below that strike price, I don't want to spend the 12 cents it would have costed me on Friday to buy the call back right now. That cost would lower my results from this trade by more than 2 cents on all of the bushels I just sold. I’m hopeful corn will rally and I have to sell another 10% of my production at higher values.
Combined Results and Overview
Following is a quick review of the trades above:
Hindsight Observations
Knowing what I know today, I wish I would have sold more before Memorial Day. But, as I look through my notes, weather forecasts were largely negative. Most called for hot and dry weather with little rain. Few expected a record crop and even with a record crop it still did not suggest that prices had to be this low. At the time there seemed to be more risk the market would go up than down. Still, I'm glad I placed the trades I did above, to protect myself if prices fell. I'm still ahead 20 cents versus doing nothing.
On a positive note, I did manage to sell over 25% of '18 corn during last May's rally above $4.20, which allowed me to get a good start on marketing sales for this upcoming harvest.
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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