Hitting singles to stay in the game

By Jon Scheve, Superior Feed Ingredients, LLC

With few issues during pollination, the chances for a widespread corn yield reduction decreases daily. Market participants indicate national average yields between 176 and 181, which would leave USDA balance sheets with the largest carryout in over 30 years.

Corn’s export market has been strong and helped maintain a steady trading range. However, South America’s corn crop will be harvested soon, and with limited storage, it will be moved quickly. This could limit U.S. corn’s upside potential as we approach our harvest time.

 

Market action

In early and mid-June there were a lot of unknowns, including corn planted acres and yield potential. It seemed unlikely corn would trade above $3.50 without a significant event. With some 2019 crop left to sell, and a lot of 2020 corn still unpriced, I made the following trades.

 

Trade 1 – 6/8/20 – Sold August call

When September corn was trading $3.38, I sold a $3.40 August call for 10 cents on 10% of my production. If September corn is above $3.40 on July 24, I sell futures for $3.40 and keep the 10 cents (it’s like selling for $3.50 total). If September corn is below $3.40 on July 24, I sell nothing and keep 10 cents profit

 

Trade 2 – 6/18/20 – Sold August straddle

When September corn was trading around $3.38, I sold a $3.35 August corn straddle (selling both a call and the put) and bought a $3.15 August put and collected 21 cents of premium against 10% of production. If September corn on July 24 is exactly $3.35 I keep all 21 cents of premium. For every penny above or below $3.35 I collect 1 cent less from the 21 cents. If the price is below $3.15 I nearly breakeven after commissions. Above $3.55 a sale is made at $3.35 and I keep 21 cents (it’s like selling at $3.55 after commission).

 

What were the purposes of these trades?

I didn’t like the prices we were trading at the time and I didn’t want to sell with all the unknowns in the market. These trades would force a sale at a price I was willing to accept, and if it didn’t stay above those prices, I would come away with additional profit premium to add to a later sale.

 

What happened?

On 7/24/20 the corn board was trading around $3.29. The calls on both trades expired worthless with no sale made.

Trade 1: No sale was made and I kept the 10 cents of premium. Trade 2: I bought the put portion of the $3.35 straddle back for around 6 cents. After all commissions, I collected over 13 cents of profit. The total premium collected between both trades was 23 cents on 10% of my production.

 

Final thoughts

I am pleased with the final results of both trades. As all farmers, I would like more corn sold at higher prices, but I feel better knowing that I’m putting myself in a position to make good sales, while also accumulating additional premium I can add to later trades to increase my final average sale price. I may not be hitting home runs right now, but a few singles keeps me in the ball game.

 

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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