Trading in a changing market

Since farmers are planting, most aren’t moving or selling grain, which has encouraged end users to increase basis across the Midwest to entice grain movement. Basis was deceptively attractive last week, as end users were still bidding against the May contract, which was trading 9 cents lower than July. This week most end users will be bidding against July and basis bids will look lower than they were, but they really aren’t when the May/July spread is take into account.

Many funds moved their long corn positions from May to July, this may have put some pressure on the May/July spread to widen beyond 9 cents. However, with the recent end user demand surge in basis, funds already long and farmers not interested in selling while in the fields, futures may see some upside potential.

While there are still a lot of reasons why prices don’t have to rally, historically the market tends to increase between late April and July 4.

Options trades

As stated above, historically the market tends to rally from April to July. Therefore, I want to be prepared to take advantage of a potential price surge. That’s why I removed some short option positions last week.

Trade #1 – On 4/18/18 when July corn was trading at $3.90 I bought back my July $3.80 straddles that I originally sold for 50 cents on 8/27/17 for 27 cents. This results in me collecting 23 cents of premium after commissions that I can add to my pot of premium for the marketing year.

Trade #2 – On 4/18/18 when July corn was trading at $3.90 I bought back my July $3.80 calls that I sold for 19 cents on 10/24/17 for 18.5 cents. This results in me losing about a half cent after commissions.

There is no doubt that buying calls is a speculative trade for me. Even though this is a controlled spec trade where I can’t lose more money than I’ve spent on it, as a farmer, it’s still speculative because I’m betting the market will be going up. I don’t have all of my ’17 or ’18 crop sold yet. So because I need the price to go up to cover that unpriced grain, that makes it still speculative in nature.

 

So why do it?

The straddles were originally put in place because I thought the market would likely trade sideways through July. Now that the market dynamics appear to have changed, I think there is a better chance the market could exceed $4.03 by July. The reason its $4.03 is because that is the average top end of the straddle and call range price based upon the futures level the day I bought the options back. By removing both of these trades, I can now take advantage if prices rally higher at any point and I don’t need to wait until 6/23/18 to see what the outcome will be.

In other words, if prices are above $4.03 on 6/23/18, I made the right decision. Below $4.03, and I shouldn’t have made the switch. Considering that July corn was only $3.90 on the day I bought the options, I only need a 13-cent rally for this decision to be the more profitable choice. With futures closing at $3.99 on Friday, I feel good about the decision right now.

 

Flexibility when market dynamics change

Those who have followed my trades over the years know I’m not a fan of buying options. That being said, I avoid ruling anything out when it comes to grain marketing. Sometimes market dynamics shift so much that it can makes sense for farmers to consider alternative grain marketing strategies.

After reviewing corn acre planting intentions and trendline yields, I think it’s the first time in 6 years that with “normal” conditions, corn carryout could drop significantly this year. If this happens, there is potential for a rally as summer approaches, so I want my marketing plan to have enough flexibility to take advantage of potential upside available.

While I want to stay flexible and maximize all possible opportunities, I also want to avoid putting all of my eggs in one basket too. I didn’t buy all of my option strategies back, so I still have some sideways protection if the market doesn’t rally. I have been making sales over the last month or so which limits some of my risk should the market take a turn lower.

I try to maintain a balanced marketing plan that takes into consideration all possible scenarios (up, down and sideways). While balance is important, flexibility as market dynamics change is just as important. Staying flexible allows me to take advantage of opportunities that become available quicker and easier.

 

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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