Market Commentary for 7/31/22
Jon Scheve with weekly market commentary made on July, 29, 2022
The market is in a holding pattern until more is known about the national yield. Weather forecasts for extreme heat and limited precipitation over the next two weeks is a concern. The upcoming August 12th USDA report is one of the more important of the year because it will release the first satellite yield estimates and include a planted acres update. Plus, the market is still wondering if grain will be shipped out of Ukraine by Black Sea routes. With all of these unknowns, substantial price risk in either direction remains.
2021 Corn Marketing Summary
Following provides an overall summary of the trades I made for the 2021 crop year. To evaluate the full potential of a marketing year, it is important to analyze the three variables that make up the cash price received: futures, basis and carry.
For the crop years 2013 through 2019, the most profitable marketing approach was to be 100% priced on futures before harvest. Over the last 30 years, this was also the best marketing strategy about 75% of the time. However, there have been crop years where it was better to price corn after harvest, like 2010, 2011, 2020, and now 2021 too.
Interestingly, there was a different reason each crop year for why this happened:
2010 – surprise national yield reduction after harvest
2011 – widespread drought conditions
2020 – unexpected massive purchases by the Chinese
2021 – war in Ukraine
As the market rallied in late December of 2020 and early January 2021, I decided to protect 30% of my upcoming 2021 production by making sales at what was then historically good values of $4.25 per bushel. While with hindsight these sales were made too early, for the 6 years prior, values had been consistently much lower. Therefore, those initial sales seemed like solid sales targets at the time. It was the classic approach of “I hope these are the worst sales I make all year,” and they were.
As the year progressed, China’s unexpected and substantial grain buying became apparent. Therefore, it seemed prudent to leave upside potential open through the growing year in case there were production issues. However, in May 2021, December corn dropped over $1.30 from its $6.38 high in just 3 weeks. While I still thought there was upside potential in the market, I wanted downside protections if there was another rally. Just two weeks later in early June, the market rallied back nearly all it lost in May. During this rally I bought a $5.30 put on my remaining 70% of unsold anticipated production on June 7th for 30 cents, shown as the yellow Xs below. After the cost of the put, this provided a guaranteed $5 floor on the 70% of corn production I was protecting with the puts.
Basically, after including my earlier $4.25 sales positions, I had a guaranteed average floor value of $4.77 with unlimited upside potential on 70% of my production. After experiencing the market meltdown in summer of 2019 due to the surprise increase in planted corn acres, I didn’t want a profitable year to disappear again.
In the 13 years prior, I had never bought puts as a protection play. Historically, 80% of the time it has been better to just make sales as prices rallied and expect seasonal pull backs. However, I remembered the huge market rallies during the summers of 2011 and 2012, following the surprise crop shortages from the 2010 and 2011 harvests. In both years a solid put strategy was more effective than out-right sales. The surprise demand during the 2020 marketing year seemed like the surprise yield reduction after the 2010 harvest, and similar trading may follow.
As the chart above shows, the market never traded below $5 the rest of the year and the put I purchased eventually expired worthless when corn traded up to $5.80 in late November. Still, I considered the puts an insurance policy I’m glad I didn’t need to collect on.
With the market trading around $5.80 in late November, it seemed the market would likely trade between $5 and $6.50 until the following summer. Therefore, I placed open orders and option strategies that maximized my profitability if the market remained range bound or forced me to sell on a rally. At the time, it seemed unlikely corn would trade above $6.50 for any reason, but I kept 20% of my production back just in case there was a surprise.
Nearly 11 months after my first 2021 sales, I made another sale on the crop. In late November 2021, the next sale was triggered at $5.95. Then a $6.25 sale was triggered in January and another $6.50 sale price was triggered in February, all shown in red Xs below.
The yellow Xs represent forced sales when my option strategies hit at $6.30 and $6.46. The green Xs are from when I rolled new crop sales back to the old crop. As I shared last week, these produced sales of $7.30. The final average futures sales on my remaining 70% of corn was $6.56 futures, which was higher than any price the market traded on December futures before harvest represented by the blue line above. With the 30-cent cost of the put protection factored in, I essentially sold $6.26 on 70% of my corn and $4.25 on 30%, for a final average futures value of $5.66. From a historical perspective, it seems crazy that only 30% of the crop sold at $4.25 would be considered disappointing and drag an average down so significantly. The profits generated from last year’s crops are still some of the best ever for my farm. Basis The average basis range during a marketing year near my farm in Southeast Nebraska is usually -40 at harvest up to -10 picked up on the farm in the spring or early summer. As I shared over the last 2 weeks, when accounting for inverse spreads, I sold my corn for basis levels at:
+38 on 70%
-10 on 10%
+10 on 20%
This means I have a +28-basis average, picked up on my farm, which is almost 40 cents better than a normal year. I have only set basis above 0, picked up on my farm, in four other years since the 2007 ethanol mandate: 2010, 2011, 2012 and 2020. Market Carry or Storage In 12 of the last 15 years, I have collected market carry and averaged 25 cents in gains those years. In 2012, 2020, and 2021 I did not collect carry. However, as noted above, I instead sold basis much higher than normal. This year I had a negative 6 cent carry cost to hold 70% of the sales until I set basis. This meant nearly a 5-cent cost across all of my basis values to roll my hedges forward searching for better basis values. Therefore, the +28-basis value traded, picked up on my farm, was closer to +23, which is still WELL above normal. Rolling New Crop Sales Back Over the last 15 years, I always had all my old crop marketing year futures price set by the end of the marketing calendar year in summer. However, this year with the upside potential and put protection I purchased last summer, I still had unpriced grain from the previous crop at the end of the marketing year. This allowed me to take advantage of the 90-cent inverse in futures prices by moving unsold positions to next year. Essentially, I got paid to “kick the can down the road” on my unsold 2021 crop to the end of the 2022 crop marketing year looking for higher values. I’m pleased with the flexibility and profit this trade allowed me. Bottomline for 2021 The 2021 marketing year was more complicated than the 2020 crop year. However, I was able to take advantage of opportunities in futures, basis, and spreads as they became available. I’m happy that adjusting my marketing strategy and using put protections for the first time allowed me to reduce risk with a guaranteed floor price. Plus, my average price on that portion of the crop was sold higher than anything I could have traded before harvest. Next week I will provide an update of my 2022 crop position.
Jon Scheve Superior Feed Ingredients, LLC
9358 Oak Ave Waconia, MN 55387 email@example.com