USDA observations

By Jon Scheve, Superior Feed Ingredients, LLC

The Jan. 10 USDA report wasn’t as big of a market mover as some expected. Corn and beans closed only up 2 cents after the report. Following are some highlights.

 

Planted and harvested acres

A surprise was the USDA reducing planted and harvested acres slightly for 2018 as well as 2019. However, the difference in harvested acres between the 2 years was still less than a 1-million-acre reduction.

 

Yields

Probably a bigger surprise was that yields were increased by 1 bushel per acre instead of a slight reduction. The USDA announced they will resurvey 5 northern states in the spring, it seems unlikely the national yield average would increase from those unharvested acres. Therefore, a carryout reduction is still possible later this year.

 

Total production

After taking into considering the acre reduction for both crop years, there was only a slight increase of 50 million bushels in total production with the surprise yield increase. If there is just a 5% yield loss on the remaining 1 billion bushels still sitting in fields, that would offset the increases in this month’s USDA report.

 

Feed demand

The USDA reduced feed and residual demand by 180 million bushels from last year’s crop, but raised estimates in that same category for this year by 250 million bushels.

 

Corn exports

Export estimates were reduced for this crop year by 75 million bushels because sales have been slow to this point. If a China trade deal includes corn purchases, this category could see adjustments higher in future reports.

 

Corn carryout

World carryout inventories are down 10% from last year, and U.S. corn carryout is the tightest number in 4 years, which could help keep prices from going too much lower.

 

Corn

Overall the report was not bearish for corn, and there are some potential opportunities for improved prices eventually. If the export pace can pick up and should the resurvey of 5 northern states show a reduction in total production, then corn could find a little upside potential down the road.

 

Beans

Beans changed little in the report. Phase 1 of the trade deal will have the biggest impact on price direction for the next couple of months.

 

Market action

On Dec. 27 my January options trade expired. The following details the trade and the final outcome.

 

Straddle trade

On 10/16/19 when March corn was trading $4.00, I sold a January $3.90 straddle (selling both a $3.90 put and a $3.90 call) on 10% of my 2019 production collecting just over 24 cents total.

 

What does this mean?

  • If March corn is $3.90 on 12/27/19, I could keep all 24 cents.
  • For every penny corn is below $3.90 I get less premium penny for penny until $3.66.
  • At $3.66 or lower I lose money penny for penny on this trade.
  • For every penny higher than $3.90 I get less premium penny for penny until $4.14.
  • At $4.14 or higher I have to make a corn sale at $3.90 against March futures, but I still keep the 24 cents, so it’s like selling $4.14.

 

My trade thoughts and rationale on 10/16/19

Export pace seemed to slow when December futures topped $4 and March futures were around $4.10. I am disappointed corn dropped 10 cents from its high 2 days earlier, but I think selling this straddle will give me the chance to reach that level again. Also, once harvest is over and grain bins are locked, I expect corn to be range bound between $3.70-$4.10 through the end of 2019. I think it’s unlikely the market will decrease significantly during the next couple of months, so I placed a trade to capture profits if the market should trade just below $4 on the March futures.

 

What happened?

Upon expiration of the options, the market closed exactly on the strike price I selected at $3.90 two months earlier. Shortly before the options expired, and with futures trading slightly below $3.90, I bought back the put portion of the straddle trade for 1 cent including commissions. I was concerned the put options could get exercised and make me long (force a buy of) corn futures. As a producer I don’t need to buy more corn.

Now that knew for sure I was going to collect 23 cents from this trade regardless of where futures went, I hoped the call portion of this trade would get executed and turn into a short futures position on 10% of my production. The reason was that I felt I needed to make another sale before the USDA report, in case the report was bearish. Unfortunately, very few options were exercised the day the options expired. Then on the following Monday corn was down and no sale was made in my account.

 

Futures trade

As stated above, I wanted to increase my sales before the January crop report. When corn bounced back from the 5-cent drop a few days after my options trade mentioned above expired, I sold March futures at $3.91 on 1/2/20.

Adding both trades together, $3.91 futures sale + 23 cents of options premium, I’m left with a sale worth the equivalent of $4.14 March futures.

 

Current corn position

I now have just over 60% of my 2019 production sold with an average futures price of about $4, including all options profits from straddles and losses from buying calls last summer. I still have 40% of my crop left to sell, and with the information from this report it seems I might have some upside opportunity down the road.

 

Please email jon@superiorfeed.com with any questions or to learn more. 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.

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