Market Commentary for 7/19/24
This week I drove I-35 from Minneapolis, MN to Des Moines, IA, then took I-80 west to Lincoln, NE, and then highway 77 to Beatrice, NE. South of Clear Lake, IA, crops looked like one of the best I have seen in July for the last 10 years. From Minneapolis to the state line, there were clear signs of extremely wet weather, but it wasn’t as bad as expected. About 50% of the crop in that area looked good and I didn’t see many prevent plant acres.
In conversations this week with client producers spread throughout the US, 90% are expecting average or above average yields this year. Areas of concern are south central and southwest Minnesota where there has been excessive precipitation. There are also a few farmers scattered throughout the plains that have experienced some hail and minor wind damage too.
Overall, the weather this summer has been milder than what was forecasted several months ago. Moving forward, weather forecasts look favorable for good, if not great, yields throughout the corn belt. If good weather continues, it increases the chances for a new record national yield, which would likely pulls prices lower in August.
Market Action
Several farmers have asked how I am managing the continued decrease in prices this year, so the following is a summary of my 2023 and 2024 positions.
2023 Corn and Beans
All my 2023 corn was priced at just under $6 from protections I put in place 18 months ago. I finished hedging my 2023 beans in February at an average value in the mid $12s.
2024 Corn
I have 100% of my corn’s downside protected at $4.50 on December futures.
In February when futures were $4.75, I used a combination of futures and options trades to get this floor value. To secure this price point, I also had to give up unlimited upside potential above $5.10 on 50% of the crop.
At the time, I knew good/normal summer weather could push prices below $4.00, but widespread drought conditions could also mean a dramatic price increase. I wanted to be prepared for both scenarios. Therefore, I placed protections to the downside that still provided some upside potential if something unexpected did occur.
2024 Beans
In February I also protected 100% of my 2024 beans to the downside.
I sold 50% of anticipated production using November futures at $11.67 and for the other 50% I bought $11.60 November puts for 63 cents. The puts provided a guaranteed floor of $10.97 ($11.60 strike price – the 63-cent cost of the puts). Overall, this meant I had an $11.32 guaranteed futures floor price with unlimited upside potential on 50% of the crop, minus the cost of the puts.
This past week I sold the $11.60 Nov puts for $1.23. This reimbursed my original 63 cent put cost and gave me a 60-cent profit on the trade. I used that profit to buy January $10.80 puts for 57 cents on 50% of my production.
My new floor on the puts is $10.83 ($10.80 strike price + 3-cent profit between the two option trades). When combined with the $11.67 futures trade, my downside is protected with a guaranteed floor price of $11.25 for the rest of the year.
Why Did You Do This?
While my guaranteed floor decreased 7 cents ($11.32 to $11.25), I don’t have to worry about the 63-cent cost of the put I originally spent for downside protection if futures rally. Now I have unlimited downside protection for no cost, and unlimited upside potential on 50% of my beans for another 5 months.
Bottomline
Right now, breakevens for most farmers on the 2024 crop are about $4.75 December futures for corn and $11.30 November futures for beans using normal yields for both. My goal with the protection trades was to at worst breakeven this year.
My corn floor guarantee is about 25 cents below the breakeven price. However, I expect to make up that difference if prices drop with the options trading strategies I have used the last few years (and have explained in previous newsletters). In the last 2 years alone, I averaged an additional 20 cents in profit for the entire crop. Using these strategies, along with collecting market carry by holding my grain in my bin until next summer, I should be profitable again in 2024 regardless of any price direction moving forward.
My bean floor guarantee is 7 cents lower than my breakeven price. However, with prices currently trading 80 cents below my breakeven, I sleep better knowing any losses will be extremely limited, and I still have some upside potential available if prices go up.
With good profits from my 2023 crops, and likely very limited losses in 2024 with upside potential still available, I am comfortable with any price direction the market gives me for the rest of the year.
Want to read more by Jon Scheve?
Is Corn Done Going Down?
Corn Will Probably Struggle To Rally Moving Forward
Understanding Why I Like Margin Calls
Why I Prefer Using Futures Instead of HTAs
How Many Acres of Corn Will Be Planted This Year?
