Jon Scheve with weekly market commentary made on February, 24, 2023
Corn closed down for the third day in a row. However, it has still remained range bound between $6.50 and $6.90 since December 20th.
Since the ethanol mandate started in 2007, May corn futures have been above $4.29 on the first trading day of the year 8 out of 16 years (including this year - 2023). The chart below shows for those other 7 years how the price then fluctuated through April.
As one can see, when May corn futures have started the year off above $4.29, they have eventually rallied above the closing value of this point in the year by the end of April every time. While past performance is never a guarantee of future results, it will be interesting to see if this trend continues in 2023. Market Movers The market continues to watch the Mato Grosso region’s planting pace in Brazil, where nearly 50% of their second corn crop is grown. Currently, estimates indicate planting pace is slightly behind the 5-year average. If the pace falls further behind in early March, yields might be reduced in the future because corn reproduction will be pushed back to their drier period in late May. US corn export pace is still behind USDA estimates. Any sales increase could bolster the market. Market Action On December 21st when March corn was trading at $6.60, I suspected corn prices would likely be range bound or slightly higher at the end of February. Therefore, I placed a trade to maximize some profit potential if that happened. On 10% of my 2022 production, I sold a $6.75 March straddle (i.e., sold both the $6.75 March put and the $6.75 March call which are based upon March futures) which allowed me to collect a net positive value of over 45 cents. What Does This Mean? If the value of March corn on February 24th is:
Above $7.20 – I will sell futures at $6.75, but I keep all of the 45 cents collected on the trade, so it would be like selling $7.20 futures.
Below $6.30 – I give back all of the 45 cents collected from the trade, and I start to lose on this trade penny for penny below this value.
Between $6.30 and $7.20 – I keep some of the 45-cent profit I collected when I placed the trade. The closer the price is to $6.75, the more I keep from the trade.
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 $7.20.
Prices go down - Based on the previous several months, it seemed unlikely corn would trade to the lower end of this range. Plus, it was only 10% of my production, and I had already collected profit on this type of trade over the last three months. Therefore, 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 February 17th, a week before the options expired and March corn was trading at $6.78, I bought back the $6.75 puts and calls for nearly 11 cents. Since there was a chance corn could move more than the 11 cents by the expiration date, I wanted to lock in the 33 cents of profit (after commissions) that I could apply to my final prices (i.e., the 45 cents originally collected less the 11 cents to buy back both options and commissions). Bottomline: This is the fourth straddle where I collected a profit in the last four months. I have now made $1.58 per bushel profit on 10% of my production while the market has stayed mostly 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