Many are trying to estimate the expected bean production in Argentina, the third largest bean producing country. Prices could still range from below $9 to above $12 depending on weather and production issues during the next month.
As planting season approaches, corn slowly trends higher. Generally farmers aren’t selling at current values and are hoping for higher prices this summer. While dry weather this summer may trigger higher prices, normal weather would likely mean similar prices to 2017 — a limited trading range.
Last summer, during a brief weather rally, I hedged 25% of my 2018 corn crop at a $4.18 average on Dec futures. I’d like more sold, but selling at $4 (or less) is below my breakeven and I’m unsure how prices will fare through summer. As always, I want prices to go up, but there is a good chance they won’t. Therefore I want to minimize my risk. That’s why over the last 40 days I did the following trades, so I’m profitable if prices remain sideways through the fall.
On 1/18/18, when Dec corn was $3.85 I:
• Sold a $3.70 straddle (where I sell both the put and call for the same price) covering potentially 10% of 2018 production
• Bought a $3.50 put
• Collected a total of 38 cents premium for the trade
• Options expire on the Friday after Thanksgiving.
Then on 2/9/18, when Dec corn was $3.93 I:
• Sold a $3.90 straddle covering potentially another 10% of 2018 production
• Bought another $3.50 put
• Collected a total of 44 cents premium to place the trade
• Options expire on the Friday after Thanksgiving.
What does this mean?
As always, before doing any trade I fully understand all possible market scenarios (i.e. up, down, sideways) and I’m prepared for any outcome. I also write them down, so I don’t forget the rationale behind each trade I do.
- If corn is below $3.57 on 11/23/18, I won’t sell any corn with these trades. However, I still get to keep some of the premium. At most I’ll make 30 cents of premium, if prices are $3.56. At worst I’ll make 20 cents of premium if prices fall below $3.50, but on only 10% of my production.
- If corn is above $4.20 on 11/23/18, I have to sell 20% of my 2018 production for $4.20.
- If corn is $3.57 – $4.20, the value is represented in the chart below. For instance, if futures prices are $3.70, then I would get $4.30 for my corn. If the futures price is $3.90, then I would get $4.50 but on only 10% of production. Note, the black dot represents what prices were the day I made the last portion of the trade.
In other words, with this trade I’ll be able to reach profitable price points if the market remains sideways on a small portion of my production. Even if prices go up, that’s OK because I’ll still get $4.20 for these trades (plus I have more unpriced corn to sell). Even if prices fall below $3.50, I still get some additional premium (20 to 30 cents) that I can use on a future trade.
Maintaining a flexible marketing strategy has many advantages in maximizing profit potential and minimizing risk. Back on 1/18/18 I was concerned that $4.10 may not be reachable before harvest, therefore I did a straddle trade that was most profitable in a sideways market to spread my risk. Then a month later the market dynamics changed, allowing me to increase my upper range limits of the 1/18/18 trade to provide me more upside. By not only having a marketing strategy in place, but also allowing for flexibility, I can maximize opportunities that becomes available.
I did each of these trades because I think there is a strong chance the market will continue sideways and I want to sell at profitable levels if this happens. While I’m pleased with these trades and I’m willing to accept all possible outcomes, if a sideways market doesn’t continue, it’s obviously not ideal. For instance, if prices plummet, this trade doesn’t have any downside protection. The added 20- to 30-cent premium I will receive will ease the sting, but I still won’t have any additional corn sold because of the trade. On the flip side, if there is a drought and prices rally significantly, I have to sell double the bushels I intended to profit on in a sideways market.
As a farmer who always has more corn to sell, I can’t just sit around and wait for the perfect scenario to sell. With what I know today, a significant rally or price drop seems unlikely. Therefore, including trades in my marketing strategy that are profitable in a sideways market makes the most sense for me right now.
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 firstname.lastname@example.org.