A look at futures sales

By Jon Scheve, Superior Feed Ingredients, LLC 

Corn rallied this week mostly because Russia closed the Black Sea corridor and then bombed the port facilities in Odessa, Ukraine. Over the past year, this corridor has allowed a lot of grain to be transported out of the region. Therefore, if no new trade deal is finalized and the grain movement infrastructure is destroyed, upside price potential could be very high. However, if the trade corridor is renewed, then there likely will be a market pull back.  

Generally, the U.S. corn crop seems to have had nearly ideal July weather with timely rains to this point. While nothing is guaranteed yet, weather risk in the market is decreasing every day.

Market Action – 2023 Corn futures sales

Corn Trade 1– Futures sale

On 9/7/22, I sold the first 10% of my 2023 corn crop at $6.25 futures, which was at least 60 cents higher than my breakeven point for the year. At the time I thought it was a good starting price for my next crop. 

Corn Trade 2 – Floor protection

On 2/15/23, December corn was trading at $5.98. I bought downside protection with $5.70 puts for just under 34 cents on 70% of my anticipated production.

What does that mean?

If the price of December corn on 11/24/23 is below $5.70 then my choices are:

• 1 — Let the options execute and sell December futures at $5.70. After the cost of the puts, it would be like selling at $5.36.

• 2 — if the price is between $5.36 and $5.70, I can sell the puts back and get some of the money I spent back but have no sales made. 

• 3 — If the price is below $5.36, then I can sell the puts back and walk away with a profit on the trade but have no sales made.

If the price of December corn on 11/24/23 is above $5.70 — the puts expire worthless, but I would have no grain sold. Basically, I would then have unlimited upside potential, less the 34-cent cost to buy the protection.

Why did you make this trade in February?

With crop insurance discovery 50% finished, there were similarities to the 2012 and 2013 crop years. See the chart below.

When comparing 2012 vs 2013, weather was the key factor in the price direction variance. Since I can’t predict the weather six months in advance, I wanted to protect against the downside risk (i.e., 2013) while allowing for as much upside potential as possible (i.e., 2012). 

Plus, there was talk the USDA economic forum in late February would show 92 million planted acres. After analyzing supply and demand balance sheets, it seemed likely carryout could hit 2 billion bushels this fall if that many acres were planted, and normal yields were achieved. Therefore, I wanted to get ahead of the crowd instead of waiting for potentially lower values. So, I pulled the trigger. 

What does this mean?

With these two trades, I have 80% of my new crop corn protected above $5.47 WITH unlimited upside potential on 90% of the crop. This is represented by the dotted yellow line in the chart below.

After the market’s reaction to the USDA reports at the end of March and June, I am happy with my decision in February. My floor price is essentially at the same level that futures are trading today, but I still have unlimited upside potential on most of my crop. 

When I combine my corn’s floor price guarantee above with my new crop bean’s floor price I shared two weeks ago, I have guaranteed a small profit on most of my 2023 production with unlimited upside potential on a major portion of my production. 

Next week I will share where I finished my 2022 corn crop 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, Neb. 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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