Jon Scheve with weekly market commentary made on January, 27, 2023
This week’s announcement that NATO forces will be supplying Ukraine with tanks indicates hostilities may be heating up. This should give the market some additional risk to evaluate as it is now uncertain how many corn acres Ukraine will get planted this upcoming spring. The Ukraine Grain Association recently suggested that a reduction in plantings was likely due to the war. If Ukraine’s weather conditions are normal, they estimate only 18 million metric tons (MMT) would be produced, and if weather is poor, it would be closer to 12 MMT. These numbers are much lower than the 22 MMT produced last year and the 40 MMT produced the year before the war started. With Ukraine needing about 6 MMT for domestic feed use each year, the fourth largest corn exporter in the world may have extremely limited supply next year. With this massive corn production decrease, Brazil’s second corn crop being planted next month will need to hit current estimates. Otherwise, rationing will be needed throughout the rest of the world. Another concern is that Brazil is expected to have a record bean crop. If they have a large corn crop too, it will put a lot of pressure on Brazil’s export supply chain. Therefore, any logistics issue could mean the world will be searching for anywhere between 160 million to 400 million bushels of corn. Most of that would likely need to be supplied by the US later in the year. And with tight stocks already, it may be a challenge for the US to cover all of Ukraine and any potential Brazil supply shortages. Market Action On November 21st when March corn was trading at $6.63, I suspected corn prices would likely be range bound or slightly higher after the new year. Therefore, I placed a trade to maximize some profit potential if that happened. On 10% of my 2022 production, I sold a $6.90 February straddle (i.e., sold both the $6.90 February put and the $6.90 February call which are based upon March futures). This allowed me to collect a net positive value of 50 cents. What Does This Mean? If the value of March corn on January 27th is:
Above $7.40 – I will sell futures at $6.90, but I keep all the 50 cents collected on the trade, so it would be like selling $7.40 futures.
Below $6.50 – I give back all the 50 cents collected from the trade, and I start to lose on this trade penny for penny below this value.
Between $6.50 and $7.40 – I keep some of the 50-cent profit I collected when I placed the trade. The closer the price is to $6.90, the more I keep.
Why Did You Make This Trade? I was comfortable with all potential outcomes.
Prices go up - I would be happy selling 10% of my crop at $7.40.
Prices go down - Based on the previous several months, it seemed unlikely corn would trade to the lower end of this range. Plus, since it was only 10% of my production and I had already collected profit on this type of trade previously, the downside risk seemed limited.
Prices stay sideways - I would collect additional profits to add to later sales, which seemed the most likely scenario.
What Happened? On January 18th, over a week before the options expired, corn was $6.80. I bought back the $6.90 puts and calls for nearly 15 cents, because I was worried that corn could drop further as we approached the expiration date. After commissions, I made about 35 cents of profit that I can apply to my final prices (i.e., the 50 cents originally collected less the 15 cents to buy back both options). Bottomline: This is the third straddle I collected a profit on in three months. Combined I have made a $1.25 per bushel profit on 10% of my production, while the market has stayed relatively sideways. These trade examples illustrate how selling straddles in sideways markets can be a great way to increase profits. However, they need to be done carefully. Farmers need to fully understand and be willing to accept all potential final outcomes if prices go up, down or sideways before placing these types of trades.
Jon Scheve Superior Feed Ingredients, LLC
9358 Oak Ave Waconia, MN 55387 jon@superiorfeed.com
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