Market action for sideways prices

Soybean market commentary

Argentina weather remains good, which could mean an increase in bean yield estimates.  If this continues, global supply will be high and likely push down prices. The key will be plenty of rain through the growing season, and then dry weather during harvest. Expect volatility for the next few months, as many speculators remember last year’s events.

Corn market commentary

Corn continues to trade sideways. Farmers are selling when the market rallies, but quickly stop when the market pulls back. Two billion bushels of carryout will continue to hold this market back. It seems to be another year of boring winter trading months.

Looking forward, many wonder how many acres U.S. farmers will plant in 2017.  Some don’t believe early surveys suggesting reduced corn acres. However, farmers I talk to say that it’s difficult to not take the guaranteed profits of beans, when corn isn’t at profitable prices right now. If this happens, corn may have some upside potential. Still it’s unclear how accurate the USDA usage estimates are for the current year. If corn acres aren’t reduced more than 2 million acres in March, the market will be facing an uphill battle.

Market Action

Uncertain about the market direction going into spring, and with nothing sold for 2017 new crop, I want to make my first trade.  With what I know now, I expect the market to be trading sideways next fall.

Trade Details

Back on 1/23/17 – Dec ’17 corn futures were at $3.95

  • Sold 2 – Dec 4.00 calls – collected 29 cents each (or 58 cents total)
  • Bought 1 – Dec 3.50 put – paid 11 cents
  • Bought 1 – Dec/Dec +20 C.S.O. call –  paid 5 cents (I’ll explain what this is at the bottom)
  • Net profit: +40 cents (after paying a 2 cent commissions)
  • All Trades Expire: Day after Thanksgiving
  • This trade amount = 5% of planned production so I doubled the sale to get 10% coverage on.

What does this mean?

Basically I have a floor price of $3.90 and a price ceiling of $4.40, but the outcome varies depending on the price of Dec corn at expiration.

  • If Dec corn is at or below $4.20 at expiration  I get somewhere between $3.90 and $4.40
    • Every penny corn is below $4.20 to $4.00, 1 additional cent is added on to the $4.20 price (e.g. if it is $4 exactly I take home $4.40)
    • Every penny corn is below $4.00 to $3.50, 1 cent is subtracted from $4.40 all the way down to $3.90 (if it is at $3.50)
    • Anywhere under $3.50, and I still get $3.90 (5 cents below where the market was when I placed the trade)
  • If Dec corn is above $4.20 – I have to make another corn sale at $4.20 (even if corn is $4.50 or $5)
    • If this happens, I’ll most likely move this sale directly to the 2018 crop year

Why would you move the additional sale to 2018?

I don’t want to wonder all year long if I will have to increase my sales by an additional 10% sale in 2017.  I will know with certainty that at worst I move an additional sale to 2018.  In seven of the last 10 years, if I had to move a trade like this forward I would have received around a 40 cent profit (i.e. the 4.20 becomes a 4.60 sale) to move the additional sale to the following year. The three years it didn’t work was due to a drought (2010, 2011, 2012), which caused inverses (where nearby prices are higher than prices in the future) in the market.  In 2010, there was a 20 cent inverse, while 2011 had a 40-cent inverse and 2012 had a 100-cent loss.  If this happens, I will have to roll this sale to next year at those type of losses.

The trade sounds great, but the 100-cent loss is too much.

I agree, I can’t afford to take that big of a loss on a 4.20 sale.  That’s where the Dec/Dec +20 CSO call option comes into play.

A CSO option is a calendar spread option. It’s an option based upon spreads between future contracts and it is traded in the pits and not electronically.  Not many people are familiar with these types of options, so they can be harder to find quotes on when the market isn’t open.  CSO options can protect farmers from the inverses of 2010-2012 situation detailed above. It provides a guarantee that I will not take more than a 20-cent hit on the additional $4.20 sale that I would have to move from the Dec ’17 to Dec ’18.  In other words, worst case scenario: I move my $4.20 sale to 2018 and its worth $4.  This isn’t a bad spot to start pricing some corn for 2018, if it gives me the opportunity to trade at or above $4.20 in 2017 especially if the market is trading sub $4 today.

As seen in the chart below this trade gives me lots of protection and great upside potential if the market is at these levels next fall.

image001

Seems like a great trade, why not do more?

There is still the potential of doubling up 2018 sales at $4, which I’m willing to accept, but I don’t want to commit more than 10% right now.

Trade Summary

Bottom line: this is a sideways market trade play with full downside protection.

  • Market trades sideways — biggest profit (the closer the market is to $4, the better)
  • Market goes up — I get a premium that puts me on our farm’s breakeven points or better
  • Market goes down — I have a $3.90 floor price
  • Horrible drought — I miss out a little on a huge price rally, but I’m protected against having to sell more grain at lower values this year.

As I’ve mentioned before, I plan my grain marketing on what I think might happen based upon what I know today and historical trends. However, I still consider all possible scenarios the market could do.  The market can do three things: go up, go down, or go sideways.  So when making trades I need to be comfortable with all outcomes.  That’s why I always balance potential premiums on each trade against the risk I’m taking if the market goes a different direction.

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.

Trading of futures, options, swaps and other derivatives is risky and is not suitable for all persons. All of these investment products are leveraged, and you can lose more than your initial deposit. Each investment product is offered only to and from jurisdictions where solicitation and sale are lawful, and in accordance with applicable laws and regulations in such jurisdiction. The information provided here should not be relied upon as a substitute for independent research before making your investment decisions. Superior Feed Ingredients, LLC is merely providing this information for your general information and the information does not take into account any particular individual’s investment objectives, financial situation, or needs. All investors should obtain advice based on their unique situation before making any investment decision. The contents of this communication and any attachments are for informational purposes only and under no circumstances should they be construed as an offer to buy or sell, or a solicitation to buy or sell any future, option, swap or other derivative. The sources for the information and any opinions in this communication are believed to be reliable, but Superior Feed Ingredients, LLC does not warrant or guarantee the accuracy of such information or opinions. Superior Feed Ingredients, LLC and its principals and employees may take positions different from any positions described in this communication. Past results are not necessarily indicative of future results. He can be contacted at jon@superiorfeed.com.

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