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Brazilian Corn, Put Options, Broilers & Ethanol, Markets & Rain Days Update 04/28/2022


Today is the last trading day before the first notice day of delivery assignments on the May CBOT agriculture contracts. After the market closes today, any short position holder can inform the CBOT that they will make a delivery on one to one million contracts. CBOT will assign delivery notices to the oldest long (buy) May futures contract first and continue to assign delivery notices in chronological order until all the delivery contracts have been assigned. To avoid any chance of being assigned a delivery, liquidate long May futures positions before the close today. Few to no deliveries is bullish.

Suddenly, the rumors are China is looking to buy a million mts of US old crop corn.

A railroad bridge that is on the route for Ukraine’s grain moving west to the Baltic Sea ports and war material moving east was destroyed yesterday.

NOLA urea barge prices are crashing. Down a hundred plus bucks a ton Friday to Tuesday and down another $30 yesterday.

Former Minnesota farmer and now an independent agriculture consultant in Brazil, Kory Melby, reported yesterday:

I am getting more reports out of Mato Grosso stating that the 2nd crop corn in some areas are in dire condition. Some will not be harvested. I will be out there the end of May.

Daniele Siqueira is an ag consultant and reporter for AgRural, an independent consulting agency based in Brazil. Yesterday she wrote:

Brazil’s 2nd corn crop is in much better shape than a year ago and headed to a record-high production. But below-normal rains in central states are a concern.

Karen Braun is Reuters News Service’s World Agriculture Reporter. She wrote yesterday:

April will be among the driest on record for second crop corn in Brazil's top state of Mato Grosso. Rains in the crop-heavy north region have been about 40% below normal, close to 2016 levels. The rest of the 2016 season stayed dry and Mato Grosso's 2nd corn yields fell ~30%.

The first Corn Belt corn planted we have heard about from a real person was 20 acres yesterday in south central Nebraska on irrigated ground that has received 1.5 to 2.5 inches of rain since January first. Fields are bare soil because the plants are dead and residue has been blown away, so they are irrigating to keep the soil from blowing away. Where there is no irrigation, the corn planter cannot cut a slot in the ground for the seed furrow.


Put Option Discussion Continues

September wheat settled at $10.89¾, down 2¾ cents yesterday. The $10 September put settled at 49½ cents, up 2 5/8 cents. With the change in the both futures and the put option prices at 2 and a fraction cents, one would think the delta was near 1, which does happen when an option is very deep in-the-money. But the $10 put is not in-the-money at all; at yesterday’s close, the $10 put was 89¾ cents out-of-the-money with a delta of .32, as you can see on the chart below. To give you an example of a put with a delta near 1, the $17.00 September wheat put has a delta of .94! How far in-the-money is a $17.00 put with the futures at $10.90? Now that is called a deep-in-the-money option.

A person with a short September futures position yesterday would have made $137.50; a person with the $10 put would have made $131.25.

Some of you folks have had or will have your merchandiser buy the puts and attach to your HTA contracts. Wheat, corn, soybeans, oats, canola, rice, etc… the math is the same and here is how the math works:

Given: July wheat HTA at $7.00. Your merchandiser bought a $10 put at a cost of 50 cents a bushel.

Your merchandiser will attach that put and its expense to your $7.00 HTA. The $7.00 HTA becomes a $6.50 minimum price contract, meaning the worst that can happen to you is you will be paid an HTA price of $6.50. However, when that put is sold, if it is sold, the income from that sale will be added to the $6.50 HTA price. Examples:

The $10 put (bought for 50 cents) is sold when September wheat is at $6.50 on expiration day. Since it was expiration day, there would be no time value, but the intrinsic value would be $10 strike price minus the futures price of $6.50 = $3.50; thus, $3.50 is added to the minimum price of $6.50 and the HTA becomes a $10 HTA. The net cash price paid for the wheat would be $10 plus or minus the basis.

The put can be sold any day. Let’s say you thought $7.20 on July 5th was the low for September futures, so you sold the put. The $10 put would be $2.80 in-the-money and, with about 50 days of life, there would be 10 or so cents of time value, to go with the $2.80 of intrinsic (in-the-money) value, grossing $2.90 on the sale of the put. That $2.90 gets added to the $6.50 minimum price and the HTA price would become $9.40.

If the put was sold for 10 cents, the HTA price would be $6.60.

If you had the HTA at your merchandiser and you bought the put in your own options account, the HTA would be treated as a “stand-alone” transaction and the put in your own option trading account would also be a “stand alone” transaction. Your books would show profit or loss on the put transaction as hedge gain (or loss) to (or from) the HTA price at the elevator. If the option expires worthless in your own option trading account, you would still be paid the HTA price ($7.00 in the example), when the wheat was delivered, but your own books would show an income of $7 (+or- basis) a bushel minus a hedge loss of 50 cents (or whatever the cost of the put).

We expect to be recommending you buy puts for old and new corn and beans in the coming weeks to a couple months. If you do not understand how the puts work, you will not use them, in which case you will miss one of the greatest opportunities to make several dollars a bushel on every bushel of corn, wheat and beans you have grown the last year and will grow this year.

In 2012, corn futures peaked at $8.49; fourteen months later, corn futures traded to $4.10. Would not it have been sweet to capture just half of that $4.39 decline? Puts will do it for you.


Broilers & Ethanol Update

Last week:

Broiler egg set was up 1% than the same week a year ago.

Broiler egg hatch was down 1% than the same week a year ago.

Average daily ethanol production:

963,000 barrels last week.

947,000 barrels the previous week.

945,000 barrels the same week a year ago.

537,000 barrels the same week two years ago.

Ethanol inventory was 23.965 million barrels compared to 24.342 million barrels the previous week.


Market Data

This morning:

Crude oil is at $101.79, down $0.26

The dollar index is at 103.35, up 0.40

July palm oil is at 6,930 MYR, down 57. The contract high was made today at 7,132 MYR. Palm oil owns 36% and soybean oil owns 28% world market share.

December cotton is at $122.51, up $0.12 per cwt. The contract high was made April, 14th at $124.36 per cwt. Cotton competes with soybeans and corn for acres.

July natural gas is at $7.410, down 0.026. The contract high was made April, 18th at $8.279. Natural gas is the primary cost to manufacture nitrogen fertilizer.

July ULSD is at $3.6424 per gallon, up 0.0019. The contract high was made March, 9th at $3.7675. ULSD stands for Ultra Low Sulfur Diesel.


Rain Days Update

The Western Corn Belt has 1 less rain days in the 10 day forecast than yesterday and the Eastern Corn Belt has 1 more rain daysthan yesterday.

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