Making money when the market isn’t moving

Corn

Corn futures decreased 14 cents last week. There could be a 60-cent weather premium already built into Dec corn futures. Trend-line yields would likely push prices back to $3.25 at harvest. Weather is key variable for the next few months.

It’s still too early to worry about not getting the crop planted. With the recent cold and rainy weather, it doesn’t appear there will be a lot more corn acres. This is at least non-bearish news.

 

Beans

Beans only decreased slightly (4 cents) last week. Supply and demand suggests futures don’t need to rally significantly. Similar to corn, weather is the key factor moving forward. Likely a $1 per bushel weather premium is in the market right now.

 

Market action

Following is the detail and rationale of a recent trade made back in late February which expired on Friday.

  • Trade Detail — Sold May $3.75 straddle for 23 cents on 2/27/17
  • Straddle — selling a put and call at the same value
  • Expired — 4/21/17 (last trading day for May options)
  • Why this date? It is after the acreage report, but during the heart of corn planting.
  • Expected Market Direction - Most likely sideways, but maybe some upside potential in early summer.
  • Potential benefit — If May futures close at $3.75 on 4/21, I keep the 23-cent premium
  • Potential Concern — If the market moves significantly, I receive reduced or no premium. For every penny lower than $3.75, I receive less premium until $3.52. Less than $3.52, a previous corn sale is removed, but I get any profits gained on that. For every penny higher than $3.75, I receive less premium until $3.98. Above $.98 I have to make another corn sale at $3.98 against May futures.

 

What happened?

For a while corn prices were inching up, but during the last few weeks it pulled back. When the market hit $3.585, I bought back the put portion of the straddle for 16.75 cents. This meant after commissions my net profit was just about 5 cents. This was less than I had hoped for on this trade but it was still a profitable one.

 

Why didn’t you buy back the calls?

Prices were so far from the strike price of $3.75 that I didn’t see the need to pay additional commissions to get out of that part of the trade. They ended up expiring worthless.

 

Making money when the market isn’t moving

Many farmers like to buy calls, hoping the market will rally, so they can maybe make some big money. This is a risky choice, because if prices stay the same or go down, they will lose all the value of the call purchase and they will be worse off than they were previously. To compound those losses, farmers still have more unpriced new crop corn to sell.

The trade above illustrates the flexibility farmers can have during sideways markets. There is upside potential built into the trade, but if the market stays flat, there is premium opportunity for that scenario too. That’s why this type of trade is so much less risky than just buying calls. It takes into consideration multiple market place variables, and keeps hoping for increased prices at a minimum.

There was a chance a previous sale I have made could have been removed if prices dropped significantly more, but historically prices rarely drop significantly in spring and early summer, so I felt that risk was limited especially because this was only on 10% of my production.

Most farmers think sideways markets are very boring and only want prices to go up. But, if you are creative, there are many opportunities to be had, sometimes even when the market drops. Everyone wants prices to go up (me included), but I’m not going to sit around waiting and hoping. If there are opportunities available to pull premium out of the market in the meantime, I’m going to take it.

 

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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