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My 2017 And 2018 Corn Positions

Published on: 16:16PM Jan 02, 2018

Market Commentary for 12/29/17

During the holidays the board of trade is usually very slow. So, I use this time to focus on my grain marketing strategy and develop my plan for the next 3-6 months.

 

The Importance Of A Grain Marketing Strategy Over Future Price Guessing

Last week I read a great quote from Steve Johnson of Iowa State University:

 

"Farmers spend about 80% of their marketing time on outlook and 20% on tools and strategies.  It needs to be the other way around."  

 

I completely agree with this statement.  I'm constantly asked by farmers, "what do you think the markets will do?"  As I've said before, I don't know what's going to happen....and nobody else does either.  Even though many "experts" confidently explain what they think will happen, there are just too many variables that cause price movements for anyone to be correct most of the time.  Weather alone is impossible to forecast accurately and is arguably the biggest driver of price movement.  So spending a significant time on trying to predict future price movement isn't really helpful for farmers.

 

Since I don't know what prices are going to do, I spend most of my grain marketing time as a farmer developing strategies that take into consideration any event (i.e. prices go up, down or sideways).  On every trade I make, I know what price I could receive at all possible price levels, and I have to be willing to accept each outcome before placing any trade.

 

Now I could develop a marketing strategy with a hard rule of a 33% / 33% / 33% split on all of my trades against the three possible market scenarios up, down, or sideways to have, in theory, a balanced plan.  However, I don't want to be too rigid by not taking into consideration some current outlook information.  For instance, fundamentally for corn, at least in the short-term, there is a strong case for a continued sideways market due to the substantial 2017 production, large carryout, and lack of export demand.  So I've shifted a bigger percentage of my trades to take advantage of this, about 50% of my ’17 production.

 

With this marketing strategy approach, some farmers may be confused, thinking I either want the market to go nowhere or even go down.  To be clear, I ALWAYS want prices to go up.  Just because I have trades where I'm profitable in a sideways market doesn't mean I'm hoping that prices don't to go up.  If prices go up, I can sell any unpriced grain or next year's corn at higher levels.  The old adage, "plan for the worst, but hope for the best," is very applicable in my grain marketing.

 

Having A Better Marketing Strategy Sounds Great, But I Don't Know How.

Unfortunately, there is a real lack of practical and detailed information available to farmers that can help them develop well-rounded and low-risk marketing strategies.  What is available is generally limited, very basic or not very helpful.  The media, likely due to time limits or space, usually only provides short advice soundbites.  Marketing seminars may allow for more time, but usually only focus on outlook and price level "predictions."  If advice is provided, it's limited in information and often doesn't even make sense for farmers.  A common example is "farmers should sell their grain to capture the carry and look for reownership through the purchase of calls for unlimited upside potential."  On the surface this advice sounds reasonable, but when more closely analyzed, buying grain when farmers always have more to sell in the future and prices are so low and not expected to increase much at least in the short-term is in my mind very questionable advice.

 

That's why I think it's important for farmers to see real life examples of how I develop a well-rounded marketing strategy that takes into consideration all possible price scenarios, reduced risk and alternative trade opportunities they may not know is available to them. I try to be very transparent by showing not only my successes, but my failures too.  Not only is there a lot to learn in occasional failures, but often farmers can turn failures into successes if they have a comprehensive grain marketing strategy that allows for flexibility and a variety of different trade opportunities.  So, the following provides some recent trades and how the outcome effected my position.

Market Action

Previous Trade – Sold Corn Call Profit

On 10/24/17 March corn was $3.60. I thought corn would continue sideways through December, so I sold a January $3.60 call for 10 cents (expired 12/22/17) on 10% production. 

What Does This Mean?

  • If corn is trading below the strike price when this option expire - I keep the premium and add it to another trade down the road.
  • If corn is trading above the strike price when this option expire - I have to sell corn for the strike price PLUS the premium. 

What happened?

Corn was below $3.60 and the option expired worthless. I kept the 10 cent premium to add to another trade. 

Corn actually closed at $3.52 on the day the option expired. I could have sold corn on that day (12/22/17) and added 10 cents to the trade for a $3.62 price.  Had I done that, I would have still been ahead 2 cents compared to the day I sold the call (when corn was $3.60).  Instead I decided to keep the 10 cents and will add this to a future sale.  Maybe I’ll make a sale if corn rallies to $3.60, and then get $3.70 with this added profit.

 

This example illustrates that there are advantages in being open to a variety of trade options.  In this case, I  made a profit during a sideways market and I now have some added flexibility and profit built into my marketing plan.   One of those flexible type of trades is shown in the next trade

New Trade – Sold Corn Call

I think there is a lot of rationale for why a sideways market will continue through March.  So, on 12/27/17 when May corn was $3.62.  I sold an April $3.60 call for for 10 cents against 10% production of my ’17 production. This trade expires March 23rd

What Does This Mean?

  • If corn is trading below the strike price when this option expire - I keep the premium and add it to another trade down the road.
  • If corn is trading above the strike price when this option expire - I have to sell corn for the strike price PLUS the premium. 

I don't really want to sell corn for $3.60 against May futures, but if it happens, I actually get $3.70 with the 10 cent premium.  Not ideal, but not terrible considering recent price level trending. Plus, I could add the 10 cents from the trade example above for an even higher price level.  I’ll wait to make that decision in late March pending the outcome of this trade.

 

As always, before I make any trade I understand all possible trade outcomes and I'm comfortable with any potential scenarios.

 

Are You Constantly Selling The Same Bushels Over And Over?

Some farmers unfamiliar with my grain marketing strategy think I’m trading the same bushels over and over when I sell multiple call positions.  One farmer even assumed I traded the same bushels 5x-6x over one year.

 

The answer is….sometimes I do trade the same bushels multiple times, especially in a prolonged sideways market.  If a call I sold expires worthless, I will keep the premium and not sell the grain, then I will sell another call and collect more premium.  Ideally the market will eventually rally and I will have to sell my grain.  However, if this happens, since I’ve been collecting around 10 cents on multiple trades (about 3-4 times) over the past several months, I get to add that 30-40 cent of premium to a later sale.  Hopefully that sale is during a significant rally.

 

Some people may say selling calls is risky because I’ll need to sell my grain at unattractive levels if the strike price is hit.  I say, the outlook for the market doesn’t look very attractive either, so waiting for a great rally to sell also seems very risky to me.  Plus, I never make a trade unless I know exactly what price I’ll get when the option expires and I’m willing to accept that level.  I also spread my calls around to different expiration dates and different strike prices. By doing that, surprises in my marketing plan are minimized and I’m not waiting around hoping for prices to only go up.   

 

My Corn Position Today 

I'm often asked what my corn position is.  This is difficult to answer because the prolonged sideways market has forced me to shift my grain marketing strategy to a more unconventional approach, so my farm operation maintains profitability.  This shift has meant more call selling than I've done in the past.  On one hand, I’ve had a lot of success in collecting added premium that I can added to a future sale to boost profits.  But on the other hand, I don’t have much of my ’17 crop sold. This means my final cash price is a moving target based upon future price levels.  One silver lining, I have a good start on my 2018 crop.

Jon Scheve

Considering that the current cash price near my farm is $3.10 for ’17 corn, I’m pleased with my current position and I’m glad I made the shifts to my marketing strategy that I did.  Being open to unconventional options and more flexibility has been helpful during this difficult market.  Looking forward I want to increase my ’17 final cash price by late summer.  Obviously future market prices are unknown right now, so I intend to stay flexible and be prepared for quick opportunities as well as unconventional trade options to get every cent I can for my grain.

 

Jon Scheve

Superior Feed Ingredients, LLC

jon@superiorfeed.com

This email material is for the sole use of the intended recipient, and cannot be reproduced, disseminated, distributed or electronically transmitted, including any attachments, without the prior written permission of Superior Feed Ingredients, LLC.. Even though the information contained herein is believed to be reliable, we cannot guarantee its accuracy or completeness, and the views and opinions expressed are subject to change without notice. Trading commodities involves risk and one should fully understand those risks before buying or selling futures or options. This data is provided for information purposes only and is not intended to be used for specific trading strategies. 

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