Market Commentary for 3/9/18
With corn planting starting in about 30 days, the western corn belt is currently dry and the east is extremely wet. Combined with the dryness in South America, the market is noticing these less than ideal conditions and making adjustments.
Two months ago farmers were hoping for a 20 cent rally to sell some corn. Now after a 30 cent rally, many continue to hold on thinking there is more upside potential. Basis values are slightly off their highs, but considering the large futures run up, not as much as I would have expected. This is likely a sign of farmers not selling.
This week's USDA report indicated an increase in corn exports, which is helping to reduce the massive supply from the last few years. Corn may have finally turned a corner as summer approaches. Now the market will wait to focus on the end of March report concerning planting intentions.
Straddles & Calls
On 2/23/18 several of my options strategies expired. Following shows why I placed the trades at the time as well as the results.
On 8/30/17 I sold a March $3.70 straddle for 38 cents (I sold the $3.70 put and the $3.70 call and collected a total of 38 cents) - 10% production
- Trade Expiration - 2/23/18
- Expected Market Direction for Late Feb - I’m expecting a small rally but in general I expect another sideways market similar to last year
- Potential Benefit - If March futures close at $3.70 on 2/23/18, I keep all of the 38 cent premium
- Potential Concern - Reduced or no premium if the market moves significantly in either direction
- Every penny lower than $3.70 I get less premium until $3.32
- $3.32 or lower - a new crop corn sale is removed, but any profits gained on that trade can be added to a future sale.
- Every penny higher than $3.70 I get less premium until $4.08
- $4.08 or higher - I have to make a corn sale at $4.08 against March futures
On 12/4/17 when March corn traded at $3.55 I sold a March $3.60 call for 10 cents on 20% of my ’17 production
- Trade Expiration – 2/23/18
- If corn is trading below the strike price of $3.60 when this option expires - I keep the 10 cent premium and add it to another trade later.
- If corn is trading above the strike price of $3.60 when this option expires - I have to sell corn for $3.60 PLUS I keep the premium, which means, I will have a sale price of $3.70
On 2/23/18 corn closed at $3.67 on March futures. I let all of the options get exercised, the following details the results:
- Since the market was above the $3.60 strike price - I sold 20% of my corn production at $3.60 10 cents = $3.70.
- Since the market was below the $3.70 strike price - I kept 38 cents of premium but reowned 10% of my production at $3.70. That is because a straddle is a sold put position which is a trade that makes me have to buy futures at the strike price.
What Does This Mean?
Between the 2 trades above I ended up selling an additional 10% of my 2017 production for $4.08 against March futures ($3.60 sold futures 10 cents of call premium 38 cents of straddle premium).
Having the final day of trading price land between $3.60 and $3.70, resulted in the best possible outcome for these two trades. Plus, it allowed me to sell another 10% of my corn for $4.08.
Collecting Market Carry
On 2/27/18, the last trading day for March futures, I picked up an additional 8.75 cents of market carry premium by buying back the net short futures and selling May futures at the same time (i.e. "rolling" my position forward). So, now my sale above is worth $4.15 against May futures after commissions.
I also rolled all of my previous sales for my 2017 crop from the March futures to May and collected 8.75 cents of market carry there too. After accounting for these additional sales. and all the others I have made to this point, I’m approximately 30-35% done with my 2017 crop.
Selling Options As Part Of A Marketing Strategy
I hear some analysts scare farmers out of selling options with nightmare scenarios of unlimited potential loss. While I disagree with generalizations and fear tactics when it comes to marketing strategy education, I understand why they are usually so opposed to it. It really comes down to more of a narrowed focus of their "point of view" that keeps them from fully embracing alternative marketing strategies when goals are not fully aligned. Or in other words....it's because of the differing viewpoints of speculators and farmers.
In all fairness, I doubt that speculators fully understand how I, as a farmer, do my trades. As a farmer, I can profit from these types of trades because I have flexibility that speculators do not.....I have unpriced grain stored at home and know more will be grown next year. Because I also have sales on for the current crop, as well as next year’s crop, I can back up any potential purchases or additional sales from selling straddles or call options if the market moves higher or lower.
Speculators, on the other hand, don't usually have any physical grain on hand. If I was them, and did these type of trades without having some grain sold and/or more unpriced grain available to back the trades up, I would have unlimited risk too and I would not consider selling options either.
While I'm a fan of selling options because it allows me to take advantage of profitable opportunities that can be available in the market, farmers still need to be smart about it.
- Moderation - If you're a long time reader of mine, it may seem like I have a lot of trades going at any given time. In reality, I'm very careful to limit the amount of options to a certain percentage of my crop that I'm likely to produce. As with most things in life, moderation is key. Selling more options than I have grain to cover is speculation. Speculation means added risk, and I try to minimize my farm operations risk exposure.
- Understand All Potential Outcomes - Options can be a great tool, but they certainly aren't perfect and they don't work in every situation. The key is to outline for each trade all possible market scenarios (i.e. if the market goes up, down or sideways like I did above) and be willing to accept all three outcomes. If one can't accept a potential outcome, then one shouldn't do the trade in the first place.
It's tough for farmers to be profitable at any time, but especially right now. That's why being open to alternative marketing strategies that take advantage of the inherent flexibilities farmers have, can help one be more profitable year after year.
Superior Feed Ingredients, LLC
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