Markets continued to trade sideways. Farmers are selling at $3.70 futures and buyers are able to widen basis and still buy it. The flat price value of corn isn’t moving much.
On 1/22/16 a $3.80 Feb corn option that I had sold on 12/10/15 for 8 cents expired worthless. This is because March futures were under $3.80 on the day of expiration, I’m not required to do anything but collect the full premium of 8 cents. This trade represented 5% of my production.
Knowing the trade above was going to expire worthless, I sold an April $3.80 call for 8 cents on 1/22/16 to try and collect some additional premium in the future. Again representing 5% of my production. What does this mean?
Based on May corn futures – The Option expires 3/25/16
- Corn below $3.80 – I keep the 8 cents premium
- Corn above $3.80 – I have to sell grain for $3.80 but keep the 8 cents premium
◦ In other words, if this happens I sell corn for $3.80, plus an additional 16 cent premium (the 8 cent Feb call + the 8 cent April call) for a total of $3.96.
◦ Then…since I have all of my 2015 grain sold, I can move the short futures position to Dec futures for an additional 17 cents (market carry) to make a total of $4.13 sold for 2016 crop.
With what I know today, I’m pleased with either outcome of this trade.
It’s time for me to core the bins out. This should allow me to keep my remaining corn in condition until the middle of summer. Last week I found an end user willing to pay me -.20 picked up on the farm, which has been the best opportunity on basis so far on 2015 corn. So, I sold about 10% of my2015 corn production. Since making the trade, basis pulled back 10 cents with the recent 20 cent board rally. I hope the basis market rebounds, because I will need another opportunity in the spring or summer to finish selling my 2015 production.
Getting caught up in the headlines
With the market not moving in January, headlines about relatively insignificant issues are creeping up. Farmers can get so focused on these issues, that sometimes they miss the big picture and what really affects farm operation profits. Following are three big ones I’ve noticed.
Many are rushing to cover 2016 diesel inputs. While it’s important to be diligent about all input costs, fuel only represents 1% of a farmer’s overall budget. Let’s look at the numbers. Average farmers use 1 gallon/acre/field pass, or about 3-6 gallons/acre/year. Even if fuel prices adjusted a full $1/gallon this coming year, the added expense is only around $5/acre. This translates to 3 cents per bushel on corn or 11 cents on beans. The corn and bean market move that amount any given day. Realistically fluctuations would be closer to maybe 50 cents per gallon and that would mean a change of only 1.5 cents for corn and 6 cents for beans.
Fertilizer is probably the largest input cost for farmers that has significant cost adjustments. Similar to fuel costs though, even if prices decrease by $100/ton this year (a big swing), the cost would be about $15/acre less. This equates to about 10 cents/bushel. Between the two, fertilizer is the bigger worry, but relatively small in the grand scheme of things. Market prices can swing 10 cents in an active day for the corn futures.
The Realty of Corn Production Globally
Weather-related events in other countries can also make big headlines. Recently, I read that South Africa will have to import some corn due to drought conditions. On the surface this seems like a bullish story; however, South Africa only produces 1% of the world’s corn. To put it into perspective, the state of Michigan produces the same amount of corn as South Africa. Would the market get overly concerned if MI was importing corn from OH? Unless it’s college football recruits that are leaving OH for MI, I doubt many would care. This got me to think about the production of other countries in the world…
- Brazil is the 3rd largest corn producer in the world – equal to corn production in IL and IN combined
- The European Union (28 member countries) produces about 10% more corn than the entire state of IA
- Ukraine and the other 12 countries of the Former Soviet Union produce about the same amount of corn as NE and MN
- Argentina usually only produces a little more than KS and ND combined
- Mexico’s production is equal to SD
- Canada and OH produce almost the same amount each year
- Russia, the largest land mass country on the planet, raises no more corn than the state of MO each year
- India, with the world’s second largest population, only accounts for the same amount of corn grown in KY, WI and PA combined
So, what does matter when looking at the corn market?
- The United States (35%) and China (23%) account for 58% of the world’s corn production
- If IA was its own country it would be the 4th largest producer of corn in the world
- IA, IL, NE, MN, IN, and SD produce 25% of the world’s corn
- 8 Billion bushels of corn are in storage around the world, or nearly what China produces each year
- About 20% of that stored world corn is sitting on farms unpriced in bins across the United States.
What does have a big impact on farm profits?
When looking at the big picture, the number of bushels raised per acre has the biggest profit impact. Growing just one more bushel of corn per acre reduces costs by 3 cents/bushel (1 bushel of soybeans reduces costs by 20 cents/bushel). One bushel more in yield can cover a large fluctuation in fuel and has a big impact in fertilizer cost adjustments.
Large-scale weather issues in the U.S. or China will have a big impact on the market. And while isolated incidents around the world can cause price volatility, it is usually on a short-term basis. Savvy farmers will be ready to take advantage of those small rallies in their marketing plan as they come available.
Developing a market strategy that includes market carry and basis planning
As I continue to explain, having a developed marketing plan that considers the farm operation’s goals and objectives and incorporates market carry and basis strategy should not only bring bigger profits to farm operations, but reduce risk.
Bottom-line, rather than spending so much time obsessing over all those headlines, sit down and spend your time developing a more sophisticated marketing strategy. If this makes you nervous or you aren’t sure how to start, consider working with a seasoned grain marketer who can explain the more technical aspects in a way that you can both understand the process, and make you feel comfortable about what you are doing. Often there are options available to farmers that they didn’t even realize. The potential profits available for farmers will likely out-weigh fuel or fertilizer input fluctuations.
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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