Iowa State University just reported their 2017 corn and bean breakeven points. It showed that the average Iowa bean farmer can lock in 2017 crop profits with current fall market prices. That is not necessarily the case for corn. Corn on corn farmers would likely lose with today’s prices, while corn on beans are showing some profitability.
I think many farmers will take notice and plant more beans in 2017. Still, South American bean production is an unknown. If we assume a small issue in South America supply, which leads to increases for U.S. prices, the added bean acres in 2017 may be offset. However, if bean acres exceed 90 million acres and South America doesn’t have a reduced supply, then substantially lower values are a real concern.
With corn prices so low, I’m always looking for ways to add additional premium to my corn prices. Rather than wait around for prices to go up, which they may not, I manufacture trades that allow me to add premium to my corn prices, while minimizing risk. In the following example I detail out several trades I have done recently that show how premium can sometimes be added even during a sideways market.
Trade Detail #1 — Sep
- Sep – Sold $3.30 calls against Dec futures for a 15 cent premium
- Hindsight — this was a little early and the price was low. So, I wanted to increase this price to profitable levels with the next trade.
Trade Detail #2 — Nov
- Expected market direction back in Nov ’16 — Sideways through Jan
- Trade Detail — On 11/22/16 sold $3.60 straddle for 23 cents (selling a put and call at the same price)
- Potential Benefit — increase potential premium (23 cents) if market stays close to $3.60 at the end of January
- Potential Concern — reduced or no premium if the market moves significantly from that level
- What happened — Option expired 1/27 at $3.61
- Action — I bought back both straddles for 2 cents total
- Why buy them back? One of the options is exercised if I don’t buy them back. I don’t want that. I just want the premium from the trade.
- Result — Net premium 21 cents and position unchanged.
- Sold Dec Futures: $3.30
- + 15 cents — Trade #1 above, call premium
- + 21 cents – Trade #2 above, straddle
- + 11 cents – Market carry, rolling Dec futures to Mar
- + 14 cents – Market carry, will roll from Mar to July
- Current Position Value Against July Futures ($3.30 + 61 cents of premium): $3.91
Trade Detail #3 – 1/27/17
- Expected market direction today — Probably sideways with some upside potential into early summer
- Trade Detail — 1/27/17 sold July $3.90 straddle for 43 cents
- Expires 6/23/17 right when there is the best chance for a weather rally
- Potential Benefit — If July futures close at $3.90 on 6/23, I keep the 43 cent premium
- Potential concern — reduced or no premium if the market moves significantly
With this, every penny lower than $3.90 I get less premium until $3.47 and at $3.47 or lower the original corn sale is removed, but I keep the 61 cents above to be added to another sale. For every penny higher than $3.90 I get less premium until $4.33. With $4.33 or higher I have to make another sale at $4.33 and my $3.90 sale is stalled at $3.90.
Developing a strong marketing strategy
This trade is most profitable if the market goes nowhere (basically staying between $3.70 to $4.10 is optimal) through June. If that happens, I will have taken a trade that started in September at $3.30 a turned it into something between $4.10 and $4.30.
However, I have to understand the potential concerns of each trade I do. While this trade is mostly betting the market will be sideways, the market can always go up or down too. While I don’t want to take a sale back at $3.47, I know it is a possibility. However, historically usually the market doesn’t trade significantly lower in the middle of June when weather conditions are still unknown and drought could still happen. I hope the market is above $4.30 in June, as I would be perfectly happy to be forced to sell at $4.30.
I don’t like putting all my kernels in one bucket. I prefer to have multiple trades based upon many likely market outcomes throughout the year. I think a sideways market is a real possibility with what I know today, so this trade capitalizes on that. But, I also have protections in place in case something unforeseen happens.
As I’ve said before, “hoping the market goes up” is not a marketing strategy. Neither is “make the most money I can.” The most profitable AND least risky marketing strategies include different trades that take into consideration likely scenarios while balancing unforeseen circumstances.
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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