Scheve: How I'll Make $4.50 On Some of My Corn If Prices Remain at $3.90 This Fall
Feb 26, 2018
Market Commentary for 2/23/18
Many are trying to estimate the expected bean production in Argentina, the 3rd largest bean producing country. Prices could still range from below $9 to above $12 depending on weather and production issues during the next month.
As planting season approaches, corn slowly trends higher. Generally farmers aren't selling at current values and are hoping for higher prices this summer. While dry weather this summer may trigger higher prices, normal weather would likely mean similar prices to 2017...a limited trading range.
Last summer, during a brief weather rally, I hedged 25% of my 2018 corn crop at a $4.18 average on Dec futures. I'd like more sold, but selling at $4 (or less) is below my breakeven and I'm unsure how prices will fare through summer. As always, I want prices to go up, but there is a good chance they won't. Therefore I want to minimize my risk. That's why over the last 40 days I did the following trades, so I'm profitable if prices remain sideways through the fall.
- On 1/18/18, when Dec corn was $3.85:
- Covered potentially 10% of 2018 production
- Sold a $3.70 straddle (where I sell both the put and call for the same price)
- Bought a $3.50 put
- Collected a total of 38 cents premium for the trade
- Options expire on the Friday after Thanksgiving
- Then on 2/9/18, when Dec corn was $3.93:
- Covered potentially another 10% of 2018 production
- Sold a $3.90 straddle
- Bought another $3.50 put
- Collected a total of 44 cents premium to place the trade
- Options expire on the Friday after Thanksgiving
What Does This Mean?
As always, before doing any trade I fully understand all possible market scenarios (i.e. up, down, sideways) and I'm prepared for any outcome. I also write them down, so I don't forget the rationale behind each trade I do.
- If corn is below $3.57 on 11/23/18, I won't sell any corn with these trades. However, I still get to keep some of the premium. At most I'll make 30 cents of premium, if prices are $3.56. At worst I'll make 20 cents of premium if prices fall below $3.50, but on only 10% of my production.
- If corn is above $4.20 on 11/23/18, I have to sell 20% of my 2018 production for $4.20.
- If corn is between $3.57 - $4.20, the value is represented in the chart below.
- For instance, if the futures price is $3.70, then I would get $4.30 for my corn. If the futures price is $3.90, then I would get $4.50 but on only 10% of production.
- Note, the black dot represents what prices were the day I made the last portion of the trade.
In other words, with this trade I'll be able to reach profitable price points if the market remains sideways on a small portion of my production. Even if prices go up, that's ok because I'll still get $4.20 for these trades (plus I have more unpriced corn to sell). Even if prices fall below $3.50, I still get some additional premium (20-30 cents) that I can use on a future trade.
Why It's Important To Have A Marketing Strategy
Maintaining a flexible marketing strategy has many advantages in maximizing profit potential and minimizing risk. Back on 1/18/18 I was concerned that $4.10 may not be reachable before harvest, therefore I did a straddle trade that was most profitable in a sideways market to spread my risk. Then a month later the market dynamics changed, allowing me to increase my upper range limits of the 1/18/18 trade to provide me more upside. By not only having a marketing strategy in place, but also allowing for flexibility, I can maximize opportunities that becomes available.
Understanding The Intention Of Each Trade
I did each of these trades because I think there is a strong chance the market will continue sideways and I want to sell at profitable levels if this happens. While I'm pleased with these trades and I'm willing to accept all possible outcomes, if a sideways market doesn't continue, it's obviously not ideal. For instance, if prices plummet, this trade doesn't have any downside protection. The added 20-30 cent premium I will receive will ease the sting, but I still won't have any additional corn sold because of the trade. On the flip side, if there is a drought and prices rally significantly, I have to sell double the bushels I intended to profit on in a sideways market.
As a farmer who always has more corn to sell, I can't just sit around and wait for the perfect scenario to sell. With what I know today, a significant rally or price drop seems unlikely. Therefore, including trades in my marketing strategy that are profitable in a sideways market makes the most sense for me right now.
Superior Feed Ingredients, LLC
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.