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

Published on: 15:13PM Mar 04, 2019

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Market Commentary for 3/1/19
Argentina corn is cheaper than US corn because the South American corn crop conditions are above normal.  Because it's difficult to store grain in the southern hemisphere, it's priced to move.  Wheat pulled back as well and some see wheat working into feed rations at the displacement of corn.
 
Recent Farmer Observations and Concerns
Winter doesn't seem to want to end.  Currently in Minneapolis there is 3 feet of snow on the ground and it's not expected to be above 30 degrees for another 10 days from here to Des Moines.  Usually the snow is starting to melt in MN by the end of March.  The prolonged winter and likely flooding in northern parts of the corn belt is concerning some.
 
There are farmers who are also worried about the limited time they had for fall field work and fertilizer application.  While it's still unknown if planting will be significantly delayed, it is highly unlikely at this point to start early.
 
Farmers aren't selling corn at current levels.  Even with basis increases across the US, end users are struggling to get enough corn.
 
After visiting with farmers in the eastern corn belt last week, most say they will be keeping rotations the same.  Only a few said they plan to plant more corn than the usual rotation and very few are planting more beans.  Still, we'll have to wait for the March 29th USDA report for an estimate on the acres switching to corn, and then the June report for a more accurate account of what actually gets planted.
 
Market Action - I'm Placing More Trades That Profit If The Market Stays Sideways For Another Month
Like many farmers, I still have more 2018 corn to sell.  With this relentless sideways market at low prices, and recent success generating added premium with straddle trades, I placed 2 more straddles this week.  Following details why I made the trades and all of the possible outcomes.
 
Trade #1 – Straddle Trade
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.

Trade #2 – Straddle Trade
On 2/22/19 when May corn was around $3.85, I sold a May $3.80 straddle (selling both a put and call) and collected just over 19 cents total on 10% 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 $3.68.

My Trade Thoughts and Rationale When Placing Both Straddles On 2/22/19
These trades are 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 30% of my production above $3.90. 
 
In the past 7 out of the last 11 years corn didn't trade lower in late March or April versus February, so I think a big price drop is unlikely.  Plus, carryout is the tightest since recent drought years.  The 4 years when the market decreased springs following the ’16, ’14, ’12 and ’09 harvests. All but one of those, ’12, were in years where the carryout was increasing from the year before it.
 
In the end, if the market stays sideways, I collect more money than doing nothing or even making a sale today.  
 
Thoughts 1 Week Later On 3/1/19
The 15-cent market drop was surprising this week.  Corn is now trading at the bottom of the last 3 month's trading range.  Some expect US exports to shrink from the anticipated large South American corn harvest, which would put downward pressure on prices. But will the US farmer plant enough corn this spring? Will farmers sell at these depressed prices before they have even put a seed in the ground? It's hard to say today, but I still have 3 more weeks before the first trade expires. 

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

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

Current Corn Fundamentals: Why I Think There Is Price Rally Potential

The Pros And Cons Of Selling Straddles

Capturing Carry And Paying For Storage

What I'm Doing With Some Of My Remaining Unsold 2018 Corn

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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