Capturing market carry with corn

U.S. farmers are about halfway through planting right now. Weather forecasts seem normal and early-planted corn has had perfect conditions the past 10 days so it should be looking good. The rest of the world is drier than the U.S. though and the market is starting to notice.

Trade confusion continues to affect the bean market. Bean exports to China during summer are always much lower than during the winter. However, the Argentina drought is reducing their bean meal exports, which could increase U.S. demand for meal and thus soybeans. Long-term though normal weather and increased acres aren’t bullish for beans.

 

Captured market carry — Corn

With all of the recent trades in my account the last few months, I was short (sold) May futures that I had to exit by the end of April. Therefore on 4/27/18, I bought back my sold May futures and immediately sold July futures at 9 cents higher, capturing the market carry.

This is how I make money holding grain with on-farm storage. However, it’s important to realize the only way farmers can collect market carry is to have the grain sold first.

 

My Current 2017 corn position

Futures Prices

So far, of my 2017 crop I’m 52% sold with an average futures sale price of $3.57. All of these sales are from option strategies that got exercised, rather than traditional futures sales.

•12% of those sales were against the December

• 16% were against the March

• 24% were against the May

 

Market Carry

I’ve averaged an additional 14 cents (after commissions) of market carry on that 52% that is sold. The breakdown of that average is as follows:

• I collected 14.5 cents on the 12% portion when I rolled the Dec sales to March futures

• I collected 8.75 cents on the 12% sold against the Dec portion that was rolled to March and then again to the May, as well as the 16% sold against March that was rolled to the May

·• I collected 9 cents on every sale that had been rolled to the May as well as all sales against the May which were rolled to the July futures

 

“Pot” of option premium

Long time readers know I’ve been collecting a lot of added premium by selling calls and straddles over the last 8 months while the market traded sideways. All totaled, I’ve collected 64 cents (after commissions) on the 52% I’ve sold.

 

Price value on 52% sold against July futures

$3.57 – Futures

$0.14 – Market Carry

+$0.64 – Options Premium

· $4.35 – Equivalent value to the July Futures

Remaining 2017 position

About 20% of my ’17 production is covered with options strategies that if July corn is above:

• $3.80 on June 23rd I will get at least $3.92

• $3.90 on June 23rd I will get at least $4.10

• $4.00 on June 23rd I will get at least $4.20

• $4.10 or higher on June 23rd I will get about $4.27

 

What does this mean?

This means my average price for about 72% of my ’17 crop (52% futures sale and another 20% from options) should end up above at least $4.20, as long as July corn is above $3.80 on June 23rd. It could be as high as $4.30 if corn prices are higher than $4.00 on June 23rd.

I also have about 17% of my ’17 production sold using September options. Those expire in late August. If Sep corn is below $4.30 I will collect premium but not have to sell any grain. Above $4.30 and I will have to sell more grain for $4.30. It is difficult to say exactly what will happen with these trades because weather is an unknown. However it likely won’t change my average sold price all that much.

 

What are you hoping for?

My answer is always, I want corn prices to go higher. I have more of my ’17 crop, part of my ’18 crop and most of my ’19 crop yet to price. Historically, corn prices trend higher between May and late June, so it’s reasonable to think it will happen again.

Best case scenario — Corn is above $4.20 on June 23 and I get $4.30 on my entire 2017 corn crop. After this past year, that would be fantastic.

Worst case scenario – If corn falls to around $3.70 on June 23 and I still average over $4 for my entire 2017 corn production. While I don’t think this is likely, with what I know today, it could happen. If prices fall during the heart of the weather market period, then there are probably other forces weighing on the market that will make it difficult to recover. That is also why I have a plan in place for the ’18 crop that benefits greatly should the market pull back to $3.75 range.

 

The benefits of having a plan

As always, I’ve mapped out all possible market outcomes of my trades, based upon price level shifts, so I generally know now what to expect and what my final price likely will be for the ’17 crop. Unfortunately, most farmers do not, and instead are still waiting around hoping for prices to increase and worried they won’t.

Waiting around doing nothing and hoping prices increase makes me very nervous. My farm operation’s #1 goal is to be profitable every year and hoping isn’t really a very practical business model. Instead, I do the following actionable items that are more reliable in ensuring ongoing profitability:

• Develop a marketing plan well in advance

• Before EVERY trade I detail out all potential outcomes (up, down and sideways), and make sure I’m willing to accept all three scenarios

• As market dynamics change stay flexible and be willing to consider alternative solutions that can added more premium like selling calls or straddles on a small percentage of my crop.

These plans do not ensure that I hit the top in a given year, but they should at least put me in profitable territory every year.

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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