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Scheve: How I Could Get $4 For My Corn If Prices Are Above $3.80 On April 26

Published on: 15:57PM Mar 25, 2019

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Market Commentary for 3/22/19

It seems the market hasn't really reacted to the massive flooding throughout the Midwest. This is likely because the grain effected, currently estimated at $500 million in Nebraska alone, is relatively small.  While that sounds large, the total US corn crop is valued at about $60 billion and the bean crop at $40 billion.  So, losses may only total about 1% of the crop across the entire Midwest. 
 
An estimated 13% of ethanol production was halted this week. That demand is small though, 2 million bushels per day, compared to the estimated corn lost (about 250 million bushels).  If those plants continue to stay off line for more than 2 months, the issue could become a bigger problem.  That lack of demand can't be made up, it's lost forever because most plants were running at near full capacity.
 
This flooding may ultimately mean fewer corn acres will be planted this spring. This issue will be debated until late June.  While there may be some prevent plant acres, there is still time for a lot of acres to dry out before planting. Spring weather will dictate this outcome over the next 60 days.
 
China bought 12 million corn bushels corn this week.  While this isn't bearish news, it will take a lot more purchases for the market to get excited.  After all, just 2 weeks ago the USDA suggested the export pace would slow by 75 million bushels this year.  It would seem unlikely China would continue to buy substantial US corn when Brazil and Argentina's harvest will be in full swing next month and priced to move because of limited storage in the southern hemisphere.  However, a trade deal could force their hands, if we ever make one. 
 
Corn bounced off of a recent low this week, indicating end users may have found a level they are willing to buy.  Plus, funds seem less likely to continue shorting the market and may even be covering some of their recent sales back in as we enter the beginning of another growing cycle.  Farmers weren't selling at the bottom, but did show a little interest during this week's rally.
 
My Profits On Recent Trades - Selling A Call And Straddle
During this ongoing sideways market below breakeven prices, I continue to sell calls and straddles to pick up premium on my unsold '18 corn, so I can eventually try and manufacture profitable prices.  Following is this week's trade results.  
 
Sold Straddle
On 2/22/19 when May corn was around $3.85, I sold an April $3.80 straddle (selling both a put and call) and collected just over 12 cents total on 20% of my 2018 production.
 
What Does This Mean?

  • If May corn is $3.80 on 3/22/19, I keep all of the 12 cents
  • Every penny corn is below $3.80 I get less premium penny for penny until $3.68.
  • Every penny higher than $3.80 I get less premium penny for penny until $3.92.
  • $3.92 or higher - I have to make a corn sale at $3.80 against May futures, but I still get to keep the 12 cents, so it’s like selling $3.92
  • $3.68 or lower – I have to take a loss on this trade penny for penny below $3.68.

My Trade Thoughts and Rationale When Placing the Straddle On 2/22/19
This trade is most profitable in a sideways market, which I think is the most likely scenario right now.  If prices don't rally, I can use this premium to help push a final sale to profitable levels.  If the market rallies, I'm happy selling 20% of my production above $3.90. 

What Happened?
It's been a roller coaster ride for corn the last 4 weeks.  

  • 1st 2 weeks – market fell 25 cents
  • 3rd week – market rallied 10 cents
  • 4th week – market rallied another 10 cents

On Friday morning when May futures hit $3.80, I bought back both sides of the straddle for 2 cents. After commissions, I made 8 cents profit on this trade (12 cents collected – 2 cents to buy it back and – 2 cents in commissions).
 
I could have just sold corn at this point, and would have made more than selling outright a month earlier when I placed the trade.  (Corn closed Friday at $3.78 .08 options premium = $3.86 vs $3.85 when I placed the trade).  I didn't sell on Friday because I think there is still upside potential.  Instead, I repeated this type of trade and added another (see below).
 
Placing New Corn Trades - Selling A Call And Straddle
New Trade - Sold Call:
On 3/22/19 when May corn was at $3.80, I sold a May $3.80 call for 8 cents – expiring 4/26/19 on 10% of my ’18 production.

What Does That Mean?

  • If corn is trading below the strike price when this option expires - I keep the 8-cent premium and add it to another trade later.
  • If corn is trading above the strike price when this option expires - I have to sell corn for the strike price of $3.80 PLUS I keep the premium. This means a price of $3.88 on May futures.

My Trade Thoughts and Rationale On 3/22/19
Since I still need to sell some of my remaining '18 corn, but I don’t want to sell $3.80 May futures, this trade allows me to try and get higher values than are available today or even a month ago. If the market stays sideways, I keep the 8-cent premium. There isn’t downside protection with this trade, but that isn't the goal for this trade.
 
New Trade - Sold Straddle
On 3/18/19 when May corn was around $3.71, I sold a May $3.80 straddle (selling both a put and call) and collected 19 cents total on 20% of my 2018 production
 
What Does This Mean?

  • If May corn is $3.80 on 4/26/19, I keep all of the 19 cents
  • Every penny corn is below $3.80 I get less premium penny for penny until $3.61.
  • Every penny higher than $3.80 I get less premium penny for penny until $3.99.
  • $3.99 or higher - I have to make a corn sale at $3.80 against May futures, but I still get to keep the 19 cents, so it’s like selling $3.99
  • $3.61 or lower – I have to take a loss on this trade penny for penny below $3.61.

My Trade Thoughts and Rationale When Placing the Straddle On 3/18/19
As always, a straddle trade is most profitable if the market stays sideways.  During the market setback over the last few weeks I've felt the market is valued too low.  I was able to place this exact same trade a month ago at the same price, so repeating it again made sense to me.  Similar to the April straddle trade, I don't expect to make a lot on this trade, but I expect I’m unlikely to lose much on it also.
 
When placing straddles, I'm not worried if the market rallies, because that forces me to sell at a price, I'm comfortable with selling.  In this case, I'll be happy selling another 20% of my production for $3.99.  My fear with a straddle trade is always that the market will go lower.
 
What My '18 Corn Position Could Be In 5 Weeks
40% of my production is now covered with sold calls or sold straddles. If I include the profit from the April straddle trade that expired today, these new trades would allow me to sell the equivalent of $4 against May futures if the corn board is anywhere above $3.80 on 4/26/19.  I've limited my upside potential if there is a huge rally in the next month, but given the last 8 months, I would be very happy to get $4 on most of my remaining '18 corn.  Even if the market rallies significantly, I can still take advantage with sales on my '19 unsold corn production.
 
What If Corn Is Below $3.80?
I'll still collect some premium on the 40% of my production until the price hits about $3.60. With the April straddle profit, if corn on 4/26/19 is:

  • $3.75 - I can collect an average options premium of 15 cents or I can sell what is the equivalent of $3.90
  • $3.70 - I can collect an average options premium of 12 cents or I can sell what is the equivalent of $3.82
  • $3.65 - I can collect an average options premium of 9 cents or I can sell what is the equivalent of $3.74

What If Corn Is Below $3.60?
I would be frustrated like all other farmers, because I won’t have any additional grain sold. I would also lose penny for penny from $3.60 and lower on this trade (30% production).  While I've been picking up premium every month since last August selling calls and straddles to offset a drop like this, if the price is $3.60 on 4/26, I am chipping away at profits I have been making on previous trades.
 
Historically corn prices are in an upward trend until early summer, but that doesn't mean it can't or won't go down.  There are still a lot of unknowns:

  • How many planted acres will the USDA estimate on March 29th?
  • What will the planting pace be like this year in Mid-April?
  • How could global corn demand be affected by the spread of African Swine Fever?
  • Is a trade resolution with China completed in the next month and what does it look like?
  • Do the funds continue to buy back their short position or add to it?

While I'm doing what I think is right for my farm operation, there isn't a perfect trade out there.  I make the best decision with the information that is available to me, while trying to limit the risk exposure to my farm operation.  That being said, it will be a long 5 weeks until I see what happens and I might have to make some adjustments if new information becomes available.

Want to read more by Jon Scheve?  Check out these recent articles:

Scheve: The Challenges of Still Having Unsold 2017 Corn

Frustrations Of The Current Market And Reasons To Be Optimistic

I'm Placing More Trades That Profit If The Market Stays Sideways For Another Month

Collecting 13 Cents Premium On 30% Of My 2018 Corn Production Over The Last 3 Months

Thinking Of The Farm As A Business

Selling Hope And Time

Tell Your Friends And Neighbors To STOP USING FREE DP

The Dreaded Margin Call And Why I Don't Fear It

A Market That Goes Nowhere Can Still Provide Opportunity

The Pros And Cons Of Selling Straddles

Capturing Carry And Paying For Storage

Why I Think Buying Calls Is Gambling And Why I Avoid It

 

Jon Scheve
Superior Feed Ingredients, LLC
jon@superiorfeed.com
 
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