Being objective about the markets (in a wet planting season)

With the constant rain in Arkansas, Missouri, Indiana, southern Illinois and western Ohio, farmers are getting worried they won’t get corn planted. Some are surprised the market hasn’t responded with a rally. Prices likely haven’t increased for the following reasons. As a percent of the total U.S. production, these areas collectively don’t produce a lot of corn. These areas only account for about 10% of total acres and not every acre is a loss. The trade learned in 2015 that heavy rains throughout the Corn Belt may drown some areas, but other areas will thrive and see increased production.

Last year many farmers in these areas finished planting the last week of May and the first week of June and still had a reasonable sized crop. It’s important to remember the entire Corn Belt will never have perfect conditions. There will always be areas affected not only negatively, but positively as well. In the end, late spring weather usually won’t impact the market nearly as much as weather 40 days from now.

This past week when discussing the eastern corn belt’s weather, a farmer told me that I just didn’t understand how bad it was in his area. Maybe, but I think by not living there it was actually easier to gain perspective. By looking at weather maps, rainfall totals, and average yields in his area compared to surrounding counties, state and region I determined the issues he was suffering from were largely isolated to a very small region that didn’t produce enough corn for the market to really notice (at least not yet).

Over the last two weeks social media was “flooded” with pictures of cornfields looking like lakes. If I was a farmer in this area and only looked at posts and tweets, I would think it was time to build an ark. Nobody posts pictures of the many fields throughout the country that have had no problems and crops look great. Those pictures aren’t as interesting as a farmer wakeboarding in his cornfield.

Throughout my career in grain marketing, I’ve noticed that most market participants (i.e. farmers, end users, analysts, etc.), tend to “talk their position.” Since most farmers have a lot of 2016 and 2017 crop to sell, they want, hope and need the market to rally. On the flip side, end users want, hope and need the market to go lower. Analysts want the market to go in the direction that is most profitable to their current positions, so they’ll push that agenda. With all of these conflicting agendas, it’s difficult to sift through the media/trades to get a clear understanding of where the market is headed.

Interestingly I listened to an analyst speak about the corn market direction in the short-term. After hearing the analyst talk, a farmer told me he thought the analyst was bullish. I then asked him how much of ’16/’17 grain was still unpriced and he told me all of it. I thought the analyst presented a more neutral perspective, but I have much of my ’16 and some of my ’17 corn sold/marketed. Both of our opinions might be based upon our positions.

Many people like to read information that confirms what they believe or hope will happen. This kind of thinking can be disastrous to a farmer’s bottom-line though. I recommend trying to read marketing information from several sources, both bearish and bullish. I also recommend sticking to the same analysts to better understand their tendencies. Switching analysts each week makes it difficult to understand how they developed their strategies over the last few months.

It’s hard to stay objective when it comes to grain marketing, but there are two “rules of thumb” farmers may consider when listening to grain marketing information.

  • Often when bulls and bears agree, the market tends to move in that direction
  • Often if an analyst is usually bullish and starts pulling back or becomes neutral, it’s a sign of an upcoming bearish trend (vice versa for bearish analysts). When a bull turns into a bear, it tells me more than when a bull is a bull or a bear is a bear.

Note, I watched the wakeboarding farmer video twice. Once, because it was cool. Second, I wanted to put this into perspective and estimate his lost acres. In the video it looks like about 20 feet of corn is under water for nearly a half mile. This equates to roughly 1 acre. I also noticed pivots on the field, which in Nebraska probably means it’s about a 150-acre field. So the flooded part of the field is realistically less than 1%, which is obviously very small. Yet, several large Midwest papers picked up the story and talked about how wet it is out there. This is another reminder to always keep perspective and don’t get carried away with sensational stories.

 

Market action

Following is the detail and rationale of a recent trade made in late February, that expired Friday:

  • Expected Market Direction 2/27/17 — Probably sideways with some upside potential into early summer
  • Trade detail — Sold June $3.80 straddle for 30 cents
  • Position Size — Trade represents 10% of my 2016 production
  • Expired — 5/26/17 — After corn planting is complete, but before the weather markets take over, based upon July futures
  • Potential Benefit — If July futures close at $3.80 on 5/26, I keep the 30 cent premium
  • Potential Concern — Reduced or no premium if the market moves significantly.

For every penny lower than $3.80 I get less premium until $3.50. At $3.50 or lower a previous corn sale is removed. For every penny higher than $3.80 I get less premium until $4.10. At $4.10 or higher I have to make another corn sale at $4.10 against July futures.

 

What happened?

When the market hit $3.74 on Friday, I bought back the put portion of the straddle for 6 cents. This meant after commissions my net profit was 24 cents. This is what I hoped would happen.

 

Why didn’t you buy back the calls?

Since prices were well below the $3.80 strike price, I didn’t see the need to pay additional commissions to get out of that part of the trade. Ultimately, they ended up expiring worthless.

 

New trade

I expect the market to continue trading sideways. And, considering my recent success with straddles, I’m going to continue my straddle position moving forward. Following are the details of my new trade:

  • Expected market direction — sideways into late summer
  • Sold Sep $3.70 straddle for 38 cents
  • Trade represents 10% of 2016 OR 2017 production
  • Expires 8/25/17 after crop conditions are known
  • Potential benefit: If Sep futures close at $3.70 on 8/25, I keep the 38 cent premium
  • Potential concern: reduced or no premium if the market moves significantly.

For every penny lower than $3.70 I get less premium until $3.32. At $3.32 or lower a previous corn sale is removed, but any profits gained on that trade can be added to a future sale. For every penny higher than $3.70 I get less premium until $4.08. At $4.08 or higher I have to make another corn sale at $4.08 against Sep futures. If a Sep sale is initiated then I can move this sale to Dec futures and pick up about 10 cents of premium and thus have a $4.18 sale in place. At this point the sale would likely be against my ’17 crop.

 

What does this mean?

This Sep straddle trade provides a lot of flexibility:

  • If the market goes down, I will apply it to my ’16 production
  • If the market rallies, I will apply it to my ’17 crop.
  • If the market goes sideways, I make some added profit and can apply it wherever I want. And, I don’t have to decide that until 8/25/17.

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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