Making the most of unprofitable prices

By Jon Scheve, Superior Feed Ingredients, LLC

The market continues to go nowhere. Iowa’s storm damage doesn’t seem large enough to impact overall prices, and while dry weather pockets may hurt bean yields some, it’s unlikely to affect much of the corn this late in the growing season.

As harvest approaches, farmers will be clearing old crop out of bins, which may keep downward pressure on prices for another month.

With prices at unprofitable levels, I made 2 recent trades that helped me pick up some added premium that I’ll add to previous trades. These kinds of trades can help me maximize my profit potential in a down market.

Straddle trade

On 4/22/20 when September corn was trading at $3.27, I sold a $3.20 straddle (selling both a $3.20 put and a $3.20 call) on 10% of my 2019 production collecting 43 cents. As I was selling the straddle, I bought a $2.90 September put for 7 cents. These trades allowed me to collect a net of 36 cents total premium.

What does this mean?

  • If September corn is $3.20 on 8/21/20, I could keep nearly all of the 36 cents.
  • For every penny corn is below $3.20 I get less of the premium penny for penny until $2.90.
  • At $2.90 or lower I lose nothing on the trade, and make 6 cents guaranteed
  • For every penny higher than $3.20, I get less of the premium penny for penny until $3.56.
  • At $3.56 or higher I must make a corn sale at $3.20 against September futures, but I keep the 36 cents, so it’s like selling $3.56

My trade thoughts and rationale on 4/22/20

Due to COVID-19, ethanol demand is down 40%, and planted acres are expected to be high. Without a significant weather event, a rally seems unlikely. I think its likely prices will stay sideways through summer at unprofitable levels, so I want to look for opportunities to manufacture some premium I can add to a later trade.

However, with the outlier events of the last 18 months, I want to be cautious.  After a recent loss on a straddle trade where I didn’t protect my downside, I decided to pay 7 cents to buy a 2.90 September put, in case the market goes substantially lower. Historically, corn rarely stays below $3.50 for long (let alone $3.20), but recent events, and so much market uncertainty, makes me want to play it safe.

And knowing what I know today, being forced to sell 10% of my production at $3.56 wouldn’t be bad.

What happened

On Friday, corn closed at $3.27. I managed to buy back the $3.20 call for 6 cents (including commissions) during the trading session and I let the 2 puts expire worthless. The reason for only buying the call back was that I don’t want to be forced to sell grain at $3.20 had the option been left open while the puts had no value left. After all commissions, I made a 30-cent profit on the trade. In hindsight, I shouldn’t have bought the 2.90 put for 7 cents, but with so much uncertainty at the time, it was a reasonable decision to minimize my risk. 

This was my last trade for the 2019 crop. I can now close out my 2019 marketing position, which will be summarized in a future newsletter. 

Call trade

On 6/18/20 when September corn was trading $3.35, I sold a $3.50 call on 10% of my 2020 crop collecting 10 cents of total premium.

What does this mean?

  • If September corn is below $3.50 on 8/21/20, I keep all of the 10 cents.
  • If September corn is above $3.50 on 8/21/20, I must make a corn sale at $3.50 against September futures, but I keep the 10 cents, so it’s like selling $3.60.

My trade thoughts and rationale on 6/18/20

Corn doesn’t seem to have much upside potential. Corn acres are expected to be high, and weather has been generally good. This trade is most profitable in a sideways or lower market, which I think is the most likely scenario, with what I know today. And I’ll be happy if I’m forced to sell 10% of my corn at $3.60.

What happened

Right after the acreage report, corn initially hit $3.55 before eventually falling back into the $3.20s. So, I keep all of the 10-cent premium I collected on this trade. 

Final thoughts

Like most farmers, I’m disappointed with current corn prices. When the market consistently stays at lower levels, I try to make flexible trades that help me pick up extra profit if prices stay low, but also allow for me to sell at higher prices. With so much uncertainty around when prices will hit profitable levels again, manufacturing some premium in the short-term makes sense to me.

These two trades added 3 cents to all of my bushels grown during the 2019 crop and 1 cent to all of my 2020 crop. This added premium can help me maximize my profit potential.

Please email 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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