Jon Scheve with weekly market commentary made on October 25, 2024
The market is stuck between buyers looking for $4 corn and farmers wanting $4.20. In 79 of the last 84 trading sessions, or since the June 28th stocks report, December corn has traded at some point during the session in a tight 30-cent trading range between $3.95 and $4.25. Of the 5 days that the market did not trade in that range 2 were above the top end while 3 were below.
It’s hard to find a reason why this will change before the end of the year. Harvest is wrapping up, yields are looking fantastic, and export pace remains strong at current values.
Market Action
At the end of July, December corn was trading at $4.05. Considering the June USDA stocks and acre estimate, and the good weather up to that point, it seemed most likely corn would be range bound, or drop slightly, through harvest. Therefore, I made the following trades to maximize some profit potential if the market stayed sideways or went lower through harvest.
Trade #1 - Sold Call
On 10% of my 2024 expected production, I sold a $4.15 November call for 13 cents.
What Does This Mean?
If the value of December corn on October 25th is:
Above $4.28 – I sell futures at $4.15, but I keep all the 13 cents collected on the trade, so it would be like selling $4.28 futures.
Below $4.15 – I keep all the 13 cents, and I have nothing additional sold.
Between $4.15 and $4.28 – I keep some of the 13-cent profit I collected when placing the trade. The closer the price is to $4.15, the more I keep, but nothing additional is sold.
Trade #2 - Sold Straddle
On 10% of my 2024 expected production, I sold a $3.90 November straddle for 35 cents.
What Does This Mean?
If the value of December corn on October 25th is:
Above $4.25 – I sell futures at $3.90, but I keep all the 35 cents collected on the trade, so it would be like selling $4.25 futures
Below $3.55 – I must buy corn at $3.90 but I keep all the 35 cents collected on the trade so it would be like buying $3.55 futures
Between $3.55 and $4.25 – I keep some of the 35-cent profit I collected when I placed the trade. The closer the price is to $3.90, the more I keep, but nothing additional is sold or bought back
Trade #3 - Sold Call
In mid-August when December corn was trading at $4.00, I sold a $4.00 November call for 15 cents on 10% of my 2024 expected production.
What Does This Mean?
If the value of December corn on October 25th is:
Above $4.15 – I sell futures at $4.00, but I keep all the 15 cents collected on the trade, so it would be like selling $4.15 futures.
Below $4.00 – I keep all the 15 cents, and I have nothing additional sold.
Between $4.00 and $4.15 – I keep some of the 15-cent profit I collected when I placed the trade. The closer the price is to $4.00, the more I keep, but nothing additional is sold.
What Happened?
The options were set to expire on Friday, with December corn trading at $4.15 I did the following:
Trade 1 – I bought back the $4.15 call for about 2 cents that I previously sold for 13 cents and made 11 cents profit.
Trade 2 – I bought back the $3.90 straddle for 25 cents that I previously sold for about 35 cents and made a 10-cent profit.
Trade 3 – I bought back the $4.00 call for about 16 cents that I previously sold for 15 cents and lost 1 cent on the trade.
After all expenses and commissions, I made 20 cents of profit on the equivalent of 10% of my production. I can add this to the final value of my grain this year.
Were You Concerned About the Risk in Any of These Trades?
Before placing any trades, I always make sure I am comfortable with ALL potential outcomes. Because I had downside protection on all my crop at $4.50 until late November I wasn’t concerned if I had to buy back 10% of my production at $3.55. But this outcome seemed to be unlikely because of how far below breakeven values that would be for most farmers in this country.
It was also possible the market could rally and force me to sell between $4.15 and $4.28. However, that also seemed unlikely given the yield projections at the time and the amount of corn still being stored in farmer bins from the previous crop. Additionally, rallies from that point in summer through harvest are rare.
After evaluating all potential scenarios, a range bound market through October seemed the most likely. In the end, that’s what happened, and I managed to make a little profit during that time with what I think is minimal risk to my operation and I have not had to buy or sell any additional futures.
Bottomline
These trades were built to make a profit in a sideways market, and they are not for everyone. Before placing a trade, a farmers should understand and be comfortable with every potential outcome regardless of market direction.
If you would like to know more about the strategies I use on my farm in range bound markets like we have now, please reach out to me.
Jon Scheve
Superior Feed Ingredients, LLC
9358 Oak Ave
Waconia, MN 55387
Comments