Finding marketing opportunities

Conflicting government information affected the markets late last month. First, the U.S. Treasury Secretary said he was hoping for a weaker dollar. Then 24 hours later, the President said he favored a stronger dollar. Exports are sensitive to exchange rates, so these conflicting statements caused some market volatility.

Constantly changing weather forecasts in South America also continue to help move markets in both directions. On Jan. 26, corn traded at its highest level since late summer and after a few wild weeks beans also increased to levels unseen in the last month. With these price increases, several grain buyers throughout the Midwest reported the most farmer selling they’ve seen in months.

 

Beans — 2018 sales

With the strong rally, I hedged some 2018 beans. On 1/22/18 I sold Aug futures at $10.06 and on 1/25/18 I sold more Aug futures at $10.20. Each of these sales represent 25% of my 2018 crop, so that makes me about 50% sold for 2018 with an average price of $10.13.

 

Why August vs. November futures?

I selected Aug futures because I think the U.S. carryover will be the highest in 10 years. If that happens, the Aug to Nov spread will likely go from the current inverse, where Aug is higher priced than Nov, to a 15-cent carry, where Aug will be 15 cents less than Nov. That would enable me to then roll my sales from Aug to Nov and collect the additional profit. If that happens I’ll have an average price of about $10.28 instead of my current $10.13.

 

Is there risk involved in doing this?

While I think fundamentally there is a lot of rationale for why the scenario above is likely to happen, there is some risk in this trade. For example, two years ago the anticipated South American crop was supposed to be huge. However, ultimately widespread logistical issues caused a lot of South American crop to be lost in the fields, forcing a surge in demand for U.S. beans and prices to skyrocket for old crop. In the end, this type of trade would have lost nearly 40 cents in that situation. If the same happens again this year, my average sale price will be closer to $9.73 instead of the current $10.13.

It’s important to remember though, when prices rallied two years ago on old crop, new crop also had a big rally. And since, I still have 50% of my 2018 beans unpriced, I would be thrilled to see a rally, even if it means losing a little on the trade above.

Having trades where the worst case scenario is a market rally is not a bad market strategy. It creates balance in my marketing plan and avoids putting “all my eggs into one basket.” Waiting and hoping for a rally that may or may never come usually isn’t the best marketing plan.

 

Beans — 2017 sale

In October I sold a bean straddle and collected 45 cents premium. That trade expired in December and made me long Jan beans at $10.20. With the premium I was theoretically long $9.75 Jan futures, when the market was around $9.50. The meant that I was losing about 25 cents on the trade. Instead of just taking that loss right then and there and because I was thinking a market rally was likely, I moved the long futures to March for 11.5 cents. That basically was like making me long March beans at $9.87. Then on 1/25/18 March futures traded to $9.98, and hit an order I had placed to sell these futures back out making 11 cents profit. This is an example of how having patience and a realistic goal in my grain marketing really paid off.

 

Final 2017 bean sale price

With the above trade complete it finalizes my marketing plan for the 2017 production. My final cash price for the 2017 crop is broke down as follows:

$9.80 in Futures

$0.11 Carry

$0.03 Spread/Options Premium

- $0.70 Basis – Picked up on the farm in Beatrice, NE

$9.23 Final Bean Cash Price

 

I’m satisfied, and more importantly profitable, with my final price. But, could have I done better?

  • Carry/Basis — No, since I had to move beans before the end of the year, there was no better option or price
  • Futures — Many of my sales were made nearly 13 to 14 months ago. If I would have waited longer to set the price, I would have had better opportunities. But, with the information I had at the time, the choices I made looked to be correct.

Because my final 2017 futures price was sub $10 and I was able to lock in a price above $10 for 2018 it motivated me to sell 50% of my 2018 beans. Since corn is not at profitable prices right now for 2018, I want to take advantage in beans at profitable levels while I can. It’s hard enough to consider selling corn at unprofitable prices, I can’t have two crops in the red if I expect my farm operation to continue year after year. Knowing that 50% of my 2018 crop is already sold at profitable levels help me sleep better at night.

 

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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