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Market Commentary For 4/26/19
The corn market continues to disappoint corn producers. With increased competition from South America and export pace slowing, carryout will likely increase in future USDA reports. Even if 2019 yields are a few bushels below the average trend line, there could still be too much corn supply.
Indiana and Ohio will likely be wet for several more weeks. Minnesota and the Dakotas are forecasting more rain and cold temperatures for 7-10 days. These areas have nothing planted yet and represent 35% of the corn belt. Parts of Iowa, Illinois and Nebraska have some acres planted, but it's hard to say if it will be enough. While the market may react to these delays, it's still only late April. With the right summer weather, corn planted in late May can produce an average-sized crop.
On a positive note, basis levels are strong across the Midwest. Farmers aren't selling, so end users are having a hard time procuring their needs. Without a major rally in futures, basis could continue to strengthen to entice farmers to move some grain.
Basis levels could be MUCH higher if farmers would stop using "free DP". I have seen some end users who do not offer free deferred pricing (DP) have basis levels that are about 20 cents better than end users in the same areas who did or are still offering "free DP". Unfortunately, the few farmers who use free DP hurts prices for all farmers.
How I Lost 10 Cents Selling Straddles
Friday was the expiration date for May options. The following is a summary of options trades I had in place and their outcome.
Selling A 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.
Unfortunately, the corn market tanked, so I kept the 8-cent profit as a consolation prize.
2018 Corn - Sold Calls Summary
For my 2018 corn crop, I've sold 5 calls this year. The average profit was 10 cents on each trade for the year.
On 3/18/19 and 2/22/19, when May corn was around $3.71, I sold a May $3.80 straddle (selling both a put and call) and collected over 19 cents total on a total of 30% of my 2018 production between the two trades.
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.
The USDA stocks report shocked the market, resulting in a sharp price decline. So, on 4/26/19 when corn was around $3.51, I bought back the put portion of these straddles for 29 cents while I let the calls expire worthless. This meant I lost 10 cents total on the trade (I collected 19 cents when I originally placed the trade and paid 29 cents to exit the position).
2018 Corn - Sold Straddles Summary
While I'm disappointed in the above results, including straddles in my grain marketing strategy has overall been profitable for me. I've sold 13 straddles on my 2018 corn crop, 11 were profitable (or 85% of the time). Overall, I've averaged 12 cents profit on all 13 straddle trades, including the ones that lost money this month.
Historically, the USDA doesn't usually surprise the market this much or all that often, so the result above was unexpected. While I'm disappointed in the results of these 2 trades, I generally align my grain marketing strategy to be most profitable based upon historical trends and likely results and avoid long-shots. Plus, I understand and I am willing to accept all possible scenarios of all trades. I knew the worst-case scenario could happen. So, with this trade now behind me I'm prepared to move on to the next one.
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