No, not call a cell, sell a call!

Selling calls can boost profits

The market is quiet this week. Farmers are busy. Planting started in the west, while farmers in the east and south are waiting for soil to dry and the weather to warm.

As always there are many “levers” affecting grain prices. Arguments and estimates can be made regarding many factors towards prices.

 

Reasons to be bullish

  • The soy crush is strong and could generate demand in the U.S. feed markets.
  • Crude oil has moved off the bottom and the driving season is ahead. This is positive for ethanol demand.
  • Spec traders have a bean short position on, which they may cover if weather dynamics change.
  • Farmers aren’t selling during planting.
  • DDGs are too expensive for U.S. feed rations, which may drive up demand for corn and soymeal domestically.
  • Its still too early to rule out weather issues.
  • If the U.S. dollar were to drop in value, exports could receive a boost.

 

Reasons to be bearish

  • Some estimates indicate South American corn and bean crops are getting bigger.
  • Record amounts of soybeans are be shipped from South America to China.
  • Threats of Pacific Northwest ports closing this summer and slowing corn exports.
  • Heavy production and cheaper prices in South America has put pressure on the U.S. prices.
  • Exports of DDGs could limit corn demand and exports for the rest of the marketing year.
  • Excluding a significant weather event, corn above $4 and beans above $10 could be unlikely.
  • A stronger U.S. dollar would make exports more expensive and less likely.

 

Selling calls

I typically don’t recommend farmers buy calls. Here is why I prefer to sell them and include a recent trade example.

A potential trade opportunity — selling a call

At any time the market can go one of three directions, up, down and sideways. I don’t know where prices will go this year, but I always have a price goal where I will sell another 5% to 20% of my grain as part of my farm operation’s grain strategy. Right now, my next futures price goal is $4.50. Last week, I could have sold a $4.50 call for 20 cents against Dec futures. I view this as potentially selling corn at $4.70 if the market rallies. If the market goes down or trades sideways, I keep the 20 cents.

Some marketing years (like 2015) have so much uncertainty, that farmers don’t know what to do with the prices they are seeing. A trade like the one above is a nice way to get a price premium on part of a farmer’s crop.

But there isn’t downside protection on this trade?

True, but that is not what this trade is about. If I want downside protection, I can buy puts (the right to sell grain at a certain price) for protection at any point during the year. Buying put protection is an entirely different type of trade that leverages different market goals. In most cases, it can provide a price floor. This trade was about collecting premium in the market.

Here is an example of a recent trade I did with several new clients to make their very first call option. We sold $4 July calls for 20 cents before the March 31 report. What does this mean?

This trade is most profitable if the market stays between $3.65 and $4.20. So, while this trade does not provide downside protection, we all agreed at that time (the market was at $3.85) the chances of it falling below $3.65 wasn’t likely. On the flip side, we didn’t think the chances were good that the market would go above $4.20 before July. Plus, they were comfortable knowing $4.20 would be the most they would get for their grain (after all, they had more old crop to sell and substantial new crop still unpriced).

If the price fell below $3.65, then clearly they should have sold the grain when it was $3.85, but the farmers didn’t want to sell that value. If it does fall, at least they still get the 20 cents as a consolation prize.

But, that trade isn’t big money. No, this kind of trade isn’t a home run. It’s not designed to make a lot of money. It’s designed to get the farmer on base. Think of it this way, if a farmer did this type of trade on 5% of his crop every year 5 times a year, they would make an additional 5 cents per bushel on their entire crop. On 100,000 bushels of corn per year, this is an additional $5,000 per year. It may not sound like a lot of money, but there isn’t much at risk either. The advantage of this trade is when the farmer likes a certain price and the premium they will receive, then they put the trade on.

 

How can I make more money on my corn?

I have received so many calls this spring from concerned farmers with very little 2014 corn marketed and none of their 2015 priced. They just don’t know what to do, so many do nothing. Now that corn prices are so much lower than in years past, farmers must develop grain marketing strategies that take advantage of every opportunity out there to get the best returns. In the above examples, the payout isn’t huge, but these farmers are learning about unique opportunities available in the market that most farmers don’t realize. Every little bit adds to the farmer’s bottom line. When prices are down, savvy farmers are educating themselves on all the choices available to them.

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.

 

Check Also

Making the most of unprofitable prices

By Jon Scheve, Superior Feed Ingredients, LLC The market continues to go nowhere. Iowa’s storm damage …

Leave a Reply

Your email address will not be published. Required fields are marked *