Jon Scheve with weekly market commentary made on July, 21, 2023
Corn rallied this weekly mostly because Russia closed the Black Sea corridor and then bombed the port facilities in Odessa, Ukraine. Over the past year, this corridor has allowed a lot of grain to be transported out of the region. Therefore, if no new trade deal is finalized and the grain movement infrastructure is destroyed, upside price potential could be very high. However, if the trade corridor is renewed, then there likely will be a market pull back.
Generally, the US corn crop seems to have had nearly ideal July weather with timely rains to this point. While nothing is guaranteed yet, weather risk in the market is decreasing every day.
Market Action – 2023 Corn Futures Sales
Corn Trade #1 – Futures Sale
On 9/7/22, I sold the first 10% of my 2023 corn crop at $6.25 futures, which was at least 60 cents higher than my breakeven point for the year. At the time I thought it was a good starting price for my next crop.
Corn Trade #2 – Floor Protection
On 2/15/23, December corn was trading at $5.98. I bought downside protection with $5.70 puts for just under 34 cents on 70% of my anticipated production.
What Does That Mean?
If the price of December corn on 11/24/23 is below $5.70 then my choices are:
#1 – Let the options execute and sell December futures at $5.70. After the cost of the puts, it would be like selling at $5.36.
#2 – if the price is between $5.36 and $5.70, I can sell the puts back and get some of the money I spent back but have no sales made.
#3 – If the price is below $5.36, then I can sell the puts back and walk away with a profit on the trade but have no sales made.
If the price of December corn on 11/24/23 is above $5.70 – the puts expire worthless, but I would have no grain sold. Basically, I would then have unlimited upside potential, less the 34-cent cost to buy the protection.
Why Did You Make This Trade in February?
With crop insurance discovery 50% finished, there were similarities to the 2012 and 2013 crop years. See the chart below.
When comparing 2012 vs 2013, weather was the key factor in the price direction variance. Since I can’t predict the weather six months in advance, I wanted to protect against the downside potential (i.e., 2013) while allowing for as much upside potential as possible (i.e., 2012).
Plus, there was talk the USDA economic forum in late February would show 92 million planted acres. After analyzing supply and demand balance sheets, it seemed likely carryout could hit 2 billion bushels this fall if that many acres were planted, and normal yields were achieved. Therefore, I wanted to get ahead of the crowd instead of waiting for potentially lower values. So, I pulled the trigger.
What Does This Mean?
With these two trades, I have 80% of my new crop corn protected above $5.47 WITH unlimited upside potential on 90% of the crop. This is represented by the dotted yellow line in the chart below.
After the market’s reaction to the USDA reports at the end of March and June, I am happy with my decision in February. My floor price is essentially at the same level that futures are trading today, but I still have unlimited upside potential on most of my crop. When I combine my corn’s floor price guarantee above with my new crop bean’s floor price I shared two weeks ago, I have guaranteed a small profit on most of my 2023 production with unlimited upside potential on a major portion of my production. Next week I will share where I finished my 2022 corn crop trades.
Jon Scheve Superior Feed Ingredients, LLC
9358 Oak Ave Waconia, MN 55387 jon@superiorfeed.com
Comments