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Market Commentary for 9/6/19
While many farmers still doubt last month's USDA numbers, the rest of the trade is going along with it. Export pace and ethanol grind are weakening, frost threats are declining, and 10-day forecasts are looking very good. At this point, a production surprise will be needed for a significant price rebound. Maybe a low ear weight will be identified in next week’s USDA report to give the market a boost?
Reports from elevator managers throughout the Midwest say most farmers didn't sell very much during the recent rally, because they expected prices to go even higher. So, I'm not alone in wishing I would have sold more, but hindsight is always 20/20. Following provides details on 3 trades I made in the last 4 months. I've included my thoughts and rationale when I placed the trade to show context, as well as final outcomes.
Trade #1 - Sold Straddle
On 4/23/19 when September corn was around $3.70, I sold an August $3.60 straddle (selling both a put and call) and bought a $3.40 put while collecting a net of 29 cents on the trade. This trade was placed on about 10% of my anticipated 2019 production.
What Does This Mean?
- If Sep corn is $3.60 on 7/26/19, I could keep all 29 cents
- Every penny corn is below $3.60 I get less premium penny for penny until $3.40
- Every penny higher than $3.60 I get less premium penny for penny until $3.89
- $3.89 or higher - I have to make a corn sale at $3.60 against Sep futures, but I still keep the 29 cents, so it’s like selling $3.89
- $3.40 or lower – I collect 9 cents regardless of how low prices go but no sale is made
My Trade Thoughts and Rationale When Placing the Straddle On 4/23/19
This trade is most profitable in a sideways market, which I think is the most likely scenario given current market conditions and historical trends. Usually in a normal growing year, prices dip in late August. This straddle helps me gain some premium if the market stays sideways or goes lower, which I can use to help push a final sale to profitable levels down the road. If the market rallies, I'm happy selling 10% of my production at $3.89, because I'll then roll* the sale from September to December futures and likely pick up at least 12-15 cents in market carry; therefore, manufacturing a trade of at least $4.00 on Dec corn.
In the last 4 months, every possible market scenario happened. The market first went lower, then much higher, and finally it collapsed and settled into a sideways pattern. To say it’s been a roller-coaster ride is an understatement.
At the end of July when futures were still above $4.20, I let the options execute to get a $3.60 short on September futures. With the 29-cent premium already collected on the trade, it’s like having a sale at $3.89 Sep futures.
What Did You Do Next?
The trade above left me with a short September contract expiring at the end of August. I rolled* it to December futures on 8/29/19 and collected 10 cents of market carry premium. This makes the sale really worth $3.99 against December futures with premiums included ($3.60 futures sale + 29 of options premium + 10 cents market carry “roll”).
*Rolling a contract – means moving a sale forward to capture market carry. I bought September futures back and immediately sold December futures. It didn’t matter what September or December futures were, only the SPREAD between the two months. My sale position remains the same.
Trade #2 - Sold Straddle
On 4/23/19 I did the exact same trade again, for all of the same reasons, except I sold a September straddle instead of August (like in trade #1) which expired on 8/23/19.
On the last day that September options were trading, when September futures were about $3.59, I paid 2.5 cents to buy back both sides of the straddle and let the $3.40 put expire worthless. I was left with 26.5 cents of premium profit, but no additional sale was made.
I bought back both sides of the straddle because I didn't want to let the short put option position get executed because it would make me buy futures, and I'm not sure which direction prices will go. I also bought back the calls because I thought there was a chance for a price rally and it would allow me to consider another straddle position trade in the future.
Trade #3 - Bought Calls
On 5/28/19 September corn was $4.30, and it seemed likely there would be record widespread planting delays and significant prevent plant acres. Through other trades I already had in place, if the market rallied, 50% of my crop would be sold at $4. However, I wanted to participate if the market continued to go much higher. So, I purchased a $5.50 September call for 6 cents on about 25% of my anticipated 2019 production.
I'm usually against buying calls because the market has to rally substantially to offset/justify the price of the call and the market carry. However, the market was experiencing something never seen before, which meant I needed to consider alternative grain marketing strategies and solutions. I knew I wanted to take advantage of a potential rally, but I didn't want to "put all my eggs in one basket." To minimize potential loss from buying a call, and having the market never rally further, I selected a higher price point ($5.50) and lower call cost (6 cents).
Buying these calls was basically an insurance policy if the extreme happened and the market rallied significantly higher.
The calls expired worthless on 8/23/19. The costs of the calls, were about 1.5 cents across all of my 2019 production, which reduced my profits from trade #2 (about 2.6 cents of profit from my 2019 production) by 60%, but I'm still ahead. With all 3 trades combined, I have 10% of my production sold at $4.00 against December futures. Considering December corn is at $3.55 today I should probably feel better about these trades now.
My 2019 Corn Position
Today I have 45% of my anticipated 2019 production sold with an average price of $3.95 futures. I also have 20% of my 2020 corn sold at $4.14 average futures price.
There has never been a year like this, and harvest hasn’t even started. In June, many thought for the first time, the US wouldn’t produce enough corn to meet demand. However, in hindsight, the market focused so heavily on how the widespread planting delays would affect supply, it didn’t examine how price would impact demand.
Questions about acres still linger, but are fading by many market participants. The widespread good weather conditions through August and now September mean a surprise from an upcoming USDA report is likely necessary for a significant rally.
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