Will corn futures rally before the end of April?

By Jon Scheve, Superior Feed Ingredients, LLC 

Corn closed down for the third day in a row. However, it has still remained range bound between $6.50 and $6.90 since Dec. 20.

Since the ethanol mandate started in 2007, May corn futures have been above $4.29 on the first trading day of the year 8 out of 16 years (including this year – 2023). The chart below shows for those other 7 years how the price then fluctuated through April. 

As one can see, when May corn futures have started the year off above $4.29, they have eventually rallied above the closing value of this point in the year by the end of April every time. While past performance is never a guarantee of future results, it will be interesting to see if this trend continues in 2023. 

Market Movers

The market continues to watch the Mato Grosso region’s planting pace in Brazil, where nearly 50% of their second corn crop is grown. Currently, estimates indicate planting pace is slightly behind the 5-year average. If the pace falls further behind in early March, yields might be reduced in the future because corn reproduction will be pushed back to their drier period in late May.

U.S. corn export pace is still behind USDA estimates.  Any sales increase could bolster the market.

Market Action

On Dec. 21 when March corn was trading at $6.60, I suspected corn prices would likely be range bound or slightly higher at the end of February. Therefore, I placed a trade to maximize some profit potential if that happened. On 10% of my 2022 production, I sold a $6.75 March straddle (i.e., sold both the $6.75 March put and the $6.75 March call which are based upon March futures) which allowed me to collect a net positive value of over 45 cents.

What does this mean?

If the value of March corn on February 24 was:

  • Above $7.20 – I sell futures at $6.75, but I keep all of the 45 cents collected on the trade, so it would be like selling $7.20 futures.
  • Below $6.30 – I give back all of the 45 cents collected from the trade, and I start to lose on this trade penny for penny below this value.
  • Between $6.30 and $7.20 – I keep some of the 45-cent profit I collected when I placed the trade. The closer the price is to $6.75, the more I keep from the trade. 

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 $7.20. 
  • Prices go down – Based on the previous several months, it seemed unlikely corn would trade to the lower end of this range. Plus, it was only 10% of my production, and I had already collected profit on this type of trade over the last three months.  Therefore, 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 Feb. 17, a week before the options expired and March corn was trading at $6.78, I bought back the $6.75 puts and calls for nearly 11 cents. Since there was a chance corn could move more than the 11 cents by the expiration date, I wanted to lock in the 33 cents of profit (after commissions) that I could apply to my final prices (i.e., the 45 cents originally collected less the 11 cents to buy back both options and commissions).

Bottomline

This is the fourth straddle where I collected a profit in the last four months.  I have now made $1.58 per bushel profit on 10% of my production while the market has stayed mostly 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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