Profiting in a sideways market

The latest crop condition estimates are the lowest since 2013 (corn down 2% and beans down 4%). Also, time is running out for the western half of Iowa to get enough rain to produce average corn yields. Forecasts shift every six hours, which contributes to farmer and market uncertainties. This week it rained in the eastern corn belt, but the west continues to struggle with heat and dryness.

These uncertainties are convincing more and more farmers that crops are all but loss, causing people to think “corn HAS to rally to $4.25-$4.50.”

It seems like a lot of people are on the same side in their thinking. This makes me nervous. So, I caution farmers to take a step back and also consider the following:

  • Rumors and threats of drought happen every year
  • Realistically, the market already knows that 25% of the Corn Belt is suffering from dry weather. It’s estimating a 165 national yield with $3.90 Dec corn.
  • Informa adjusted their yield estimates from 170 to 166 this week. Funds have switched from a sizable short position to a small long position. If the funds switch back for any reason the market can drop rather quickly.
  • As Dec futures trade above $4, South American competition becomes a concern. Export opportunities could be diminished and imports a possibility.
  • Remember, earlier this year there were rumors that the Argentina bean crop yield would be much lower due to weather. In the end, it was a normal yield. I’m not suggesting we have a normal corn yield, but maybe yields won’t be as bad as some are expecting.

Fear is usually highest right before facts become available. I’m not saying that the hot and dry weather isn’t affecting corn yields. I would just caution farmers that in the end, if yields are affected minimally at harvest, lower prices are still a reasonable possibility. So you need to ask yourself, are you prepared if prices fall below $3.80 again? No one knows what’s going to happen, including me. The market could easily go either way at this point. Therefore, I suggest that farmers consider both scenarios (prices going up or down) when preparing their marketing plan.

 

Profiting in a sideways market

It’s difficult for farmers to sit back in late July when corn prices are sideways at unprofitable levels, old crop is still in storage unpriced, and next year’s harvest is only two short months away. Many are just waiting and hoping for prices to rally, because they just have to go up. But, prices don’t necessarily have to go up, and hoping they do isn’t an effective marketing strategy. So what can farmers do in the meantime?

The three trades below are examples of how farmers can pick up a little premium during a sideways market that they can later add to a trade that boosts them to profitable price points for their farm operation. None of these trades are grand slams. They’re just steady bunts and singles that fill up the bases, helping me to move forward and keep increasing the score. Sometimes by shifting the way one thinks about their marketing strategy and consider trades like these, farmers can make the best of an unpleasant situation. Prices under $4 are frustrating for everyone. We all want prices to rally. But, while everyone else is waiting around hoping, I’m going to look for potential low risk trades where I can make small profits in the meantime.

I’ve previously mentioned that I thought a sideways market in the short-term was likely throughout the summer. Therefore, I placed several trades to take advantage if this happened. This past Friday was the expiration of August Options. Following is a recap of trades I had working and the results of those trades.

 

Trade 1

On 5/2/17 I sold an Aug $3.70 straddle for 35 cents (I sold the $3.70 put and the $3.70 call and collected a total of 35 cents).

  • Trade Expiration is 7/21/17 after the weather markets for the corn crop is known
  • 5% of 2017 production (This trade takes place after 7/4, so it’s a new crop trade for me)
  • Assuming normal weather the market should trend lower
  • Potential benefit: If Sep futures close at $3.70 on 7/21, I keep the 35 cent premium
  • Potential concern: Reduced or no premium if the market moves significantly in either direction
  • For every penny lower than $3.70 I get less premium until $3.35. At $3.35 or lower a new crop corn sale is removed, but any profits gained on that trade can be added to a future sale. Every penny higher than $3.70 I get less premium until $4.05. At $4.05 or higher I have to make another corn sale at $4.05 against Sep futures. A Sep trade can then be “rolled” from the Sep to the Dec and I will like pick up 10 cents of premium and this trade would be about $4.15 against the Dec.

 

What happened?

The market was above $3.70. I let the option get exercised, since I have a little ’16 crop left to sell. This means I applied short Sep corn futures at $3.70 in my account but still collected the 35-cent premium. In other words, I sold old crop for $4.05 against Sep.

Could you have just bought the straddle back for a profit and sold at a later time?

Yes, but that would have meant extending my risk over a weekend that held a lot of weather uncertainty for the market. I didn’t want to take on the added risk. Ultimately, I was able to sell 10% of my production at a known profitable level. Considering prices the last few weeks (and even months), this trade may end up being the best price for corn this season (it’s at least the highest of the past 12 months). Plus, I was able to take some risk off the table.

Even if prices rally, I still have more ’17 crop to sell. Ideally I want this trade to be the wrong decision and prices rally.

 

Trade 2

On 6/20/17 Sep corn was trading near $3.80 I expected continued sideways trading.

 

  • The expected market direction into ate July is probably sideways with a potential small dip in prices.
  • I sold an Aug $3.75 straddle for 25 cents.
  • Expired 7/21/17 before yield is known and while there is still a chance for a weather rally.
  • Potential benefit: If Sep futures close at $3.75 on 7/21, I keep the 25 cent premium
  • Potential concern: Reduced or no premium if the market moves significantly
  • For every penny lower than $3.75 I get less premium until $3.50. At $3.50 or lower an original corn sale is removed. Every penny above $3.75 I get less premium until $4. At $4 or higher I have to make another sale at $4 against the Sep futures.
  • At this point I still have some old crop I need to sell and $4.00 seems like a great goal.

 

What happened?

When corn was trading at $3.82, I bought back the call portion of the trade for 7 cents and I let the put expired worthless. I received 25 cents when I sold the straddle originally, so I was left with 18 cents profit and my position is unchanged. The trade was designed to pick up a little premium if the market stayed sideways, which it did. I was really pleased with the outcome of this trade.

 

Trade 3

Typically corn prices decrease from the third week of June through July, and I wanted to capture that potential. So on 6/20/17 when Sep futures were around $3.80, I sold a $3.90 Aug call for 9.5 cents on 5% of my ‘16 corn production.

What does this mean?

  • If Sep corn is above $3.90 on 7/21 I have to sell corn for $3.90 and keep 9.5 cents ($3.995 total).
  • If Sep corn is below $3.90 on 7/21 I keep the 9.5 cents to use on another trade in the future.

 

What happened?

Corn was $3.80, so I collected the 9.5-cent premium on the worthless expired option.

These trades all added to my bottom line. They weren’t designed with the HOPE of a market rally. They were designed to make additional profit if the market continued on its sideways path in the short term. As a farmer it’s important to consider all reasonable market outcomes, not just “the market has to go up,” in marketing plans and strategy.

 

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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