Scheve: Breaking My Own Rules In Recent Trades
Aug 13, 2018
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Market Commentary for 8/10/18
Arguably the Aug 10th USDA report is the biggest of the year because it provides the first estimated yields for the upcoming harvest. With population estimated counts the highest ever, and ear weight estimates lower than the past two years (but still on the high side), the USDA is predicting a 178.4 average national yield.
The weather throughout the growing season has been very good for a large percentage of the corn belt to this point. Even if there is widespread dry weather throughout the Midwest during the last half of August, I’m not sure how much of a negative impact there would be on yields. On the other hand, I think some timely rains could still have a positive impact on yields going into harvest.
That being said, I'm not bearish corn long-term. Even if national yields would climb another 3 bu/acre, next year's carryout would still be lower than this year. Plus, corn demand estimates have been increasing too. As along as the expected demand is maintained, I think there is upside potential for corn once harvest is over. The upside in the corn market would be magnified even more if the national yield were to drop going into the end of the year.
Bean yield estimates also increased. Even though old crop demand increased in this report, the ongoing trade issues are still a problem. To keep bean prices from sliding further, we'll need either hot and dry weather for the next month or Chinese trade issues to be resolved. Even if current yield estimates are accurate and the trade issues were resolved overnight, prices over $10 may prove to be difficult.
Market Action - Breaking My Own Rules In Recent Trades
Long-time followers know I'm usually not a fan of buying puts. I just don't like putting protections in place well below wherever current prices may happen to be. If I'm concerned prices are going lower, it usually makes more sense for me to just sell, instead of paying money for protection and the right of hoping for a rally.
Sill, sometimes you have to break your own rules. I was worried corn yield estimates on the August report could exceed market estimates. So on 7/31/18 when Sep corn futures were $3.70, I did the following 2 trades at the same time:
- I bought Sep $3.60 puts to cover 50% of my 2018 production for 4 cents
- I sold a March $3.90 call for 24.5 cents on 10% of my 2018 production.
- Basically, I bought 5 - Sep puts for every 1 - March call I sold.
After commissions, I was able to net just over a 1 cent premium between the 2 trades.
What Does This Mean?
These trades, along with all of my other positions already in place, provide me with good protection for any outcome of the August USDA report.
- With a Bullish Report – I only have to sell 10% of my production for slightly below $4, pending where prices are in late February.
- With a Bearish Report - I'm protected at only 10 cents below what the market was trading for the day I made the trade until August 24th (2 weeks after the report).
- With a Sideways Report - All of my other trades that I have already working likely would put additional money in my "pot of premium" to add to my sales prices later.
- There is a chance that both trades could actually get hit.
- Prices could tumble in the next 2 weeks - meaning the puts make money or get exercised
- Then after harvest the market could rally high enough that my March calls also get exercised.
Knowing what I know today, I would be happy with any outcome.
Why Did You Place These Trades?
I wanted some protection in place if there was a corn market free-fall through August after the USDA report. On 7/31, much of the data I was looking at indicated yields could be higher than the trade was expecting. Plus, for the last few years corn's low for the year has been around the end of August.
If the USDA would stun the trade with lower than predicted yields, this trade would only cap me at having to sell grain at $3.90 on March futures.
If the USDA provided a neutral report, corn prices would likely remain sideways for the next few weeks. I have several trades in place already that would allow me to capitalize on this market situation. So in my mind I didn’t really see any downside to the outcome of the report.
After placing the trades above, and before the report, several farmers asked me what I wanted the report to say. I told them it didn't really matter, because I had safeguards and opportunities put into place for all possible scenarios, so I would be comfortable with any outcome. And generally, that's my preferred approach to my grain marketing strategy. Like all farmers I want prices to rally obviously, but I'm also prepared if prices don't rally, and am comfortable with that outcome too.
Superior Feed Ingredients, LLC
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