NATO tank shipments could suggest upside potential in corn

By Jon Scheve, Superior Feed Ingredients, LLC 

The recent announcement that NATO forces will be supplying Ukraine with tanks indicates hostilities may be heating up. This should give the market some additional risk to evaluate as it is now uncertain how many corn acres Ukraine will get planted this upcoming spring.

The Ukraine Grain Association recently suggested that a reduction in plantings was likely due to the war. If Ukraine’s weather conditions are normal, they estimate only 18 million metric tons (MMT) would be produced, and if weather is poor, it would be closer to 12 MMT. These numbers are much lower than the 22 MMT produced last year and the 40 MMT produced the year before the war started. With Ukraine needing about 6 MMT for domestic feed use each year, the fourth largest corn exporter in the world may have extremely limited supply next year.

With this massive corn production decrease, Brazil’s second corn crop being planted next month will need to hit current estimates. Otherwise, rationing will be needed throughout the rest of the world. 

Another concern is that Brazil is expected to have a record bean crop. If they have a large corn crop too, it will put a lot of pressure on Brazil’s export supply chain. Therefore, any logistics issue could mean the world will be searching for anywhere between 160 million to 400 million bushels of corn. Most of that would likely need to be supplied by the U.S. later in the year. And with tight stocks already, it may be a challenge for the U.S. to cover all of Ukraine and any potential Brazil supply shortages.

Market action

On Nov. 21 when March corn was trading at $6.63, I suspected corn prices would likely be range bound or slightly higher after the new year. Therefore, I placed a trade to maximize some profit potential if that happened. On 10% of my 2022 production, I sold a $6.90 February straddle (i.e., sold both the $6.90 February put and the $6.90 February call which are based upon March futures). This allowed me to collect a net positive value of 50 cents.

What does this mean?

If the value of March corn on Jan. 27 is:

  • Above $7.40 — I will sell futures at $6.90, but I keep all the 50 cents collected on the trade, so it would be like selling $7.40 futures.
  • Below $6.50 — I give back all the 50 cents collected from the trade, and I start to lose on this trade penny for penny below this value.
  • Between $6.50 and $7.40 — I keep some of the 50-cent profit I collected when I placed the trade. The closer the price is to $6.90, the more I keep. 

Why did you make this trade?

I was comfortable with all potential outcomes. 

  • Prices go up — I would be happy selling 10% of my crop at $7.40. 
  • Prices go down — Based on the previous several months, it seemed unlikely corn would trade to the lower end of this range. Plus, since it was only 10% of my production and I had already collected profit on this type of trade previously, the downside risk seemed limited.
  • Prices stay sideways — I would collect additional profits to add to later sales, which seemed the most likely scenario.

What happened?

On Jan. 18, over a week before the options expired, corn was $6.80. I bought back the $6.90 puts and calls for nearly 15 cents, because I was worried that corn could drop further as we approached the expiration date. After commissions, I made about 35 cents of profit that I can apply to my final prices (i.e., the 50 cents originally collected less the 15 cents to buy back both options).

Bottomline

This is the third straddle I collected a profit on in three months. Combined I have made a $1.25 per bushel profit on 10% of my production, while the market has stayed relatively sideways.

These trade examples illustrate how selling straddles in sideways markets can be a great way to increase profits. However, they need to be done carefully. Farmers need to fully understand and be willing to accept all potential final outcomes if prices go up, down or sideways before placing these types of trades.                    

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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