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Responding to a boring market

first_imgShare Facebook Twitter Google + LinkedIn Pinterest Market Commentary for 11/24/15The market has been incredibly boring. There are no bullish stories to report, which is frustrating to unpriced farmers. The only bright spot to low prices has been an uptick in export market potential. This could help demand build slowly.Lack of farmer selling is strengthening the basis market and causing spreads between futures months to narrow. The combination between the two may lead to a price rebound eventually.Market ActionsOptionsThe following are several options I placed in the last year:On 11/25/14, I bought 3 – $3.80 Dec puts (right to sell) for 20 cents each.  They expired last Friday.On 11/25/14 I sold a $4.70 call (right to buy) for 19 cents.On 1/7/15 I sold another 4.50 call (right to buy) for nearly 30 centsOn 7/7/15 I sold another 4.50 call (right to buy) for 19 cents.On 7/30/15 fearing a rally in futures I bought all of the calls back for around 4-6 cents.My final cost to own all the puts was 5 cents.  Meaning my $3.80 puts are really now $3.75 Dec futures sales.  These sales were intended for the 2016 crop, but with increased production this year, I’ll be using these sales for the surplus 2015 grain we harvested.I could have just collected the premium on the puts, and not converted the puts to sales.  However, then I miss out on the opportunity to collect the 18 cents carry on these sales (described below).  So a $3.75 sale and an 18 cent carry = $3.93 futures level.  While I certainly hope to make sales above that value for 2016 I’m not positive I will get that chance until maybe summer, so I thought it more prudent to take the guaranteed price now as opposed to waiting and hoping.Collecting the CarryFor years I have been telling farmers to work the carry and basis to get bigger premiums and profits in their grain marketing strategy.  Many farmers don’t understand how to “collect the carry”.This past week I collected the carry on my 2015 corn crop. What does this mean?In general, the market needs someone to hold the grain until its needed later in the year.  This “premium” is market carry, where the deferred months are trading at values higher than the nearby contracts. In other words those who store grain get paid for it. This is how your local grain elevator or ethanol plant makes some of their money.As I have shared, I’m 100% priced on the CBOT for my 2015 corn crop.  All of my sales were in the Dec futures. To collect market carry, I had to BUY my Dec futures back, and then SELL deferred contracts at the same time.  I chose the July 2016 futures, which was a $.185 premium to the Dec. Note, this doesn’t change the price I originally sold the contracts at. It merely adds carry profits to my grain I have stored.Why did I choose the July futures?– I wanted to get the most money I could as I intend to have my grain basis set, moved and marketed before July 1st of 2016.– Each time I have to “roll” my futures from one contract to another it costs me $.01/bu commission.  So by rolling to July instead of March or May, my commissions will be the lowest possible.When does this trade have to happen?I could have captured the carry anytime throughout the year, until Nov 30th.  The spread is actually traded on the CBOT.  Usually the widest point for the spread is during or at the end of harvest.  This year as seen in the graph below the spread was at its widest during planting season (black line).  This was likely a result of reduced yield in the eastern corn belt and a general lack of farmer selling at harvest.The carry premium I received for 2015, while lower than the last two years, is still above the cost of my operating note and thus a fair return (2% above cost) on my investment.  Farmers who aren’t borrowing money can view this as a guaranteed income stream of nearly 7% APR for 8 months of storage.2016 Corn CropI had about 22% of my 2016’s anticipated production priced against Dec 2015 futures with an average price of $4.40 futures.  I need to move these contracts forward.I could move them to Dec 2016 futures, but the spread between the July ’16 and Dec ’16 corn boards doesn’t seem wide enough, given the anticipated carryout next summer.  I have decided to instead leave opportunity (and some risk) open in the July ‘16/Dec ‘16 corn spread.  My upside potential is limited to about 10 cents, and my downside risk (while technically unlimited), is not likely greater than 10 cents with the information I have at this time.  This trade is not for everyone, but I understand my risks going into it.Summary I analyze trades every day that squeeze every penny out of the market, so this all comes easily to me.  But, while this type of trading may seem complicated initially, it essentially lowers farmers’ risk while still allowing upside potential in spite of market fluctuations.  Many farmers wait for prices to rally and then rush out to sell when they think prices have hit the high point.  Unfortunately, these farmers don’t realize how much more risk this way of selling grain is, versus a constant upside selling strategy combined with market carry. The market doesn’t always behave like people think it will, so I am always looking for ways to reduce and control my risk.Understanding how the carry in the corn market works can provide upside potential with limited risk.  When combined with options and futures to place protections and basis appreciation opportunities a farmer’s marketing plan can provide profitable situations in otherwise unprofitable years.POSITION – CORN20152016Corn Sold100%22%CBOT Price$4.58$4.50 estMarket Carry$0.18$.30 estBasis on Farm($.20) est($.20) estOptions & spread profits––Cash Price$4.56$4.60 est Jon grew up raising corn and soybeans on a farm near Beatrice, NE. Upon graduation from The University of Nebraska in Lincoln, he became a grain merchandiser and has been trading corn, soybeans and other grains for the last 18 years, building relationships with end-users in the process. After successfully marketing his father’s grain and getting his MBA, 10 years ago he started helping farmer clients market their grain based upon his principals of farmer education, reducing risk, understanding storage potential and using basis strategy to maximize individual farm operation profits. A big believer in farmer education of futures trading, Jon writes a weekly commentary to farmers interested in learning more and growing their farm operations.Trading of futures, options, swaps and other derivatives is risky and is not suitable for all persons. All of these investment products are leveraged, and you can lose more than your initial deposit. Each investment product is offered only to and from jurisdictions where solicitation and sale are lawful, and in accordance with applicable laws and regulations in such jurisdiction. The information provided here should not be relied upon as a substitute for independent research before making your investment decisions. Superior Feed Ingredients, LLC is merely providing this information for your general information and the information does not take into account any particular individual’s investment objectives, financial situation, or needs. All investors should obtain advice based on their unique situation before making any investment decision. The contents of this communication and any attachments are for informational purposes only and under no circumstances should they be construed as an offer to buy or sell, or a solicitation to buy or sell any future, option, swap or other derivative. The sources for the information and any opinions in this communication are believed to be reliable, but Superior Feed Ingredients, LLC does not warrant or guarantee the accuracy of such information or opinions. Superior Feed Ingredients, LLC and its principals and employees may take positions different from any positions described in this communication. Past results are not necessarily indicative of future results. He can be contacted at [email protected]last_img read more

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