Capitalizing on wish orders

The Thursday USDA report, as expected, held few surprises. The bean yields in South America continue to grow and could weigh on prices down the road.

News of bird flu outbreaks concerned traders this week. It’s still uncertain how widespread the disease will be, so the market is a little shaky. A widespread outbreak would mean lower demand for corn and bean meal.

With beans more profitable than corn at current values, many wonder how planted acres will be affected. While bean acre increases are expected, estimates still range between 88 to 90 million acres. I’ve heard experts rationalize that farmers “love to plant corn,” so more acre shifts are unlikely. I agree that most farmers love planting corn, but they also love making money, so that specific rationale is a stretch.

Still many farmers can’t or won’t change their crop rotation regardless of the market. Ultimately, it will boil down to a small percent of farmers making changes to their rotation. Realistically we are talking about 2 million of the 180 million acres slated for these two crops. This 1% of acres may seem small, but it would make a huge difference in either corn or bean carryout in either direction. This unknown is making market predictions difficult.

 

Market Action

A previously placed “wish order” to sell a $4.50 Dec call if it hits 19.5 cents for 5% of my production was hit last week.

 

This is the chart of the $4.50 Dec call value since Oct 1st.

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On Feb. 28, due to the RFS mandate rumor the call value that had been ranging between 12-17 cents since harvest, shot up to 19.5 cents for five minutes after the news broke.

 

What does this mean?

  • If corn is above $4.50 on Thanksgiving, I have to sell for $4.50 and keep 19.5 cents ($4.695 total).
  • If corn is below $4.50 on Thanksgiving, I keep the 19.5 cents to use on another trade in the future.

I’m happy with this trade. Futures haven’t hit $4.50 in the last year. So, while I hope futures rally, exceeding $4.50 will be difficult. Even if it happens, I doubt it will last long. Either way, I will get to keep an additional 19.5 cents. One downside to this trade would be a big drop in prices, because I don’t have any downside protection, but that wasn’t the goal of this trade.

 

The benefits of having wish orders in place

So many farmers miss out on opportunities by not having a marketing plan with orders in place. I was able to take advantage of the quick spike in call value because I planned ahead and had orders in place to take advantage of potential opportunities. This is another example of how savvy farmers can benefit from a market surprise.

 

Selling hope and time

Often some “experts” in the industry suggest that farmers should “look for a possible ownership opportunity.” This “advice” doesn’t make any sense. When farmers have unpriced grain in storage or the field growing, they already have ownership. They don’t need MORE corn while prices are low, they need the market to rally so they can sell the corn they have or will have. More corn only adds more risk to their farm operation. In essence, this advice is telling farmers, who are already speculators, to double down.

 

Buying hope

Most often, farmers buy calls because they HOPE the market will go up. In truth, I’ve seen very few times when farmers have made a lot of money buying calls. Most of the time they are lucky to breakeven and many times they lose.

My marketing plan does not include “buying hope,” but instead I “sell hope.” Certainly not on all of my bushels, but I do for some. Basically, I get paid for selling hope to somebody else.

Farmers need to remember that 66% of the time it will be a normal year. During normal years, prices well above breakeven points are unlikely for an extended period of time. I try to position my marketing strategies where I can take advantage of opportunities assuming trend line expectations while understanding how I will be affected by unpredictable market variations.

 

Buying time

When buying options the longer length of time until the option expires makes it worth more. More time = more chances for market movement.

Similar to hope, I don’t want to buy time. It’s expensive because it’s in finite supply and everyone wants more of it. Instead I determine what price I want, then I optimize how much (time) value I can get for that option and then I sell it.

 

Understanding volatility

Farmers are sometimes advised to not sell calls because volatility is low. Volatility basically measures the risk of the size of the market’s movement. The concept of market volatility is extremely complicated and very complex, and concerns speculators and technical traders. This concern can then be heightened by farmers who don’t understand it, paralyzing them from doing anything. However, in my opinion market volatility’s effect on farmers is far less than speculators, and really should not be a big factor when deciding to sell calls.

Currently volatility on options that expire sooner have lower values. Longer term options (e.g. six months) have mid-range value compared to ranges over the last 12 months. When thinking about volatility, farmers should keep perspective. For instance, a one or two penny difference in the price of an option can change the volatility value significantly. This kind of variance can affect speculators and technical traders. However, this one- or two-cent volatility variance to farmers isn’t as big of a deal. The reason….speculators don’t HAVE to buy and sell grain, but farmers ALWAYS have to eventually sell their grain. So, I don’t see the rationale in missing out on a potentially good call sell (like the above example of 19.5 cents) because I’m worried about one to two cents of market volatility.

I urge farmers to be careful when listening and taking advice from a trader/speculator because most often their goals don’t align with farmers’ goals. Rather farmers need to understand all the potential benefits and concerns of all trades in their grain marketing and feel comfortable with the risk and possible outcome. Buying hope and time is an expense the most farmers can’t afford.

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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