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 9/21/18
I travelled from Minneapolis, MN along I-35 to Des Moines, IA and west on I-80 to Lincoln, NE this week. I was surprised how few acres had been harvested for a crop that was supposed to be so far along. I saw nothing harvested until near Ames, IA and only about 12 combines running between Des Moines and Lincoln. It seemed that what had been harvested was evenly split between corn and beans.
The trade issues continue to hurt beans. Plus, expected yields are very high, which will lead to a large carryout. Last week, futures rallied on the hope that exports would be higher than the USDA is forecasting. Some speculators are buying in their profitable short positions to reduce risk. Consequently basis at processing plants dropped, and there is still a very weak basis around the country. This suggests to me that the upside for bean futures is minimal.
Corn appears to be the better value post-harvest based upon expected 2018 carryout levels. Still, big crops often end up being bigger than initially estimated, which would mean more supply than estimates suggest. If demand doesn't keep up, upside potential will be limited.
A recent private analysis estimated corn planted acres for 2019 will increase, suggesting corn is bearish in the long run. I suspect a weather issue would be necessary to change that view. Bean acres were forecasted to be much lower, but without a trade resolution, it's hard to estimate an outcome long-term.
Market Action - What I'm Doing To Prepare If Prices Don't Rally
Like all farmers I need corn to rally. With prices at unprofitable levels and the expected widespread high yields this harvest, I'm concerned this sideways market will continue a little while longer. Rather than sitting around waiting and hoping for a rally, I'm going to manufacture trades that can help me try to attain profitable levels, even if prices don't rally. But, I also want to allow for some upside potential if a rally does come.
Following are two trades that illustrate alternative grain marketing solutions that provide the opportunity for profitable prices, even if a rally doesn't come.
Trade #1 – Sold Straddle
On 8/30/18 when Dec corn was around $3.58, I sold a November $3.70 straddle (selling both a put and call) and collected just over 23 cents total on 10% of my 2018 production.
What Does This Mean?
My Trade Thoughts And Rationale On 8/30/18
This trade is most profitable in a sideways market. After hot and dry weather throughout August, a yield increase in the September report is uncertain. Still, typically corn bottoms out on the last trading day of August and starts increasing through October. While I'm comfortable with any outcome, I think the market continuing to trade sideways is the most likely with what I know today. I'd be happy collecting the premium to add to a later sale.
Trade #2 – Bought October Puts And Sold A March Call
Two weeks after I placed the trade above, many farmers had reported to me that their expected yields looked even better than what they thought the previous month. So, suspecting a potential yield increase in the September USDA report, I put some protections in place similar to trades I did before the August report.
On 9/10/18 two days before the report when Dec corn futures were $3.67, I did the following 2 trades at the same time:
After commissions, I was able to net just over a 1 cent premium on 10% of production between the 2 trades.
What Does This Mean?
These trades, combined with my other positions, provide good protection for any outcome of the September USDA report.
What Happened?
The USDA increased yields more than anticipated, pushing prices down immediately after the report and through Wednesday of this past week. The market then rallied 14 cents off those lows through Friday’s close.
On 9/21/18 when corn was trading $3.565, I sold back 3 of the 4 puts collecting 3.5 cents each, or 10 cents total on 10% of my production after commissions. I left the last put position in place to get executed and turn into a $3.60 sale against December futures.
I may still have to make a $3.90 sale against March futures on another 10% of my production. Given prices today, I would be happy with that outcome.
Why Make A Sale At $3.60?
For one, the 10 cent premium from the other puts makes this sale really at $3.70.
Two, being sold going into harvest allows me to take advantage of upcoming market carry potential.
Three, I'm not sure which direction the market will trade over the next month. Leaving this trade on allows me to stay protected against the $3.70 November corn straddle in trade #1 expiring in a month.
My 2018 Current Corn Position
After the sale above, 55% of my '18 crop is sold with a futures values around $4.03 against the Dec. I have options positions working on another 40% of my production that would allow me to have almost all of my crop sold at values over $4. The actual values vary depending on where the market goes over the next several months. I'll have a better idea of my exact final position once more of my options positions expire through December.
Like all farmers I want prices to rally, but I'm also preparing if they don't.
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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