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Tidbits, Put Options, Export Sales, Markets & Rain Days Update 04/22/2022

Highlights


September corn futures on China’s Dalian Exchange is $11.87 per bushel.

About a third of China’s population is on covid lockdown. That is 100 million more people than we have in the USA. That means their consumption of natural gas, coal and crude oil products will be down maybe as much as 25%. We need to watch for their recovery because their increased energy consumption will jump start the world’s energy sector.

The International Monetary Fund (IMF) reports the recent surge in strength of the Chinese yuan is making the case that the yuan should be the international trading currency instead of the dollar. For a century or longer, international trade was done in US dollars even if a US company was not involved. China’s yuan reserves have increased 23% the past year as countries trade-in their US dollars for yuan. At the top of the dollars-for-yuan list is Saudi Arabia. On the bright side, as the yuan becomes stronger versus the dollar, US products for export become less expensive.

Ag Secretary Vilsack announced the USDA will invest $420 million in 132 infrastructure projects in 31 states to rehabilitate dams, flood prevention, and watershed restoration projects.

Federal Reserve Chairman Jerome Powell said a 50-basis-point rate hike (half percent) could be coming in May. The stock market went from nicely higher to smartly lower and finished down 368 points and the dollar index was firm. Higher interest rates mean a stronger dollar which will make US goods more expensive for foreign buyers. However, if the market expects the dollar to continue higher for the long run, foreign buyers will buy commodities ahead as fast as they can before the dollar gets even stronger. To wit: 1979 saw the sharpest increase in the value of the dollar ever. US corn exports set a record high in 1979 that stood for 26 years!

Ukraine says 20% of the expected crop area for this year is planted (2.5 million hectares = 6.2 million acres). Ukraine has planted about 216,000 hectares of corn, well behind the 5-year average, with an expected total area of 4 million hectares to be planted.

The International Grains Council cut their world corn 2022 production estimate by 18.6 million mt to 1,197 million mt; the adjustment for lost production in Ukraine. The USDA is at 1,210.45 million mt.

The reason we usually mention where the USDA numbers are compared to all other sources is the market trades USDA numbers more than any other source, Therefore, other sources provide the market with the many sets of numbers. If most other sources are consistently higher or lower than USDA, we get a good indicator of what USDA will do on future S&D Reports.

Egypt says it has enough wheat in its reserves to meet domestic needs until January. Don’t believe it. They are worse than the Chinese are about lying to knock prices down.

Argentina’s Rosario Exchange increased corn and soybean production estimates; soybeans up 1.2 million mt to 41.2 million mt (USDA at 43.5) and corn up 1.5 million mt to 49.2 million mt. (USDA at 53).

May CBOT options expire today at the close of the CBOT. The spec funds will continue to muscle May futures lower to keep as many calls from being exercised as possible, Yesterday, they took out the May $8.10 and $8.00 corn calls. Today they will go for $7.90. That means they will do their best to get May corn to settle today at $7.90 (or maybe $7.80) so all the calls from $7.90 up will expire worthless. Why? Because that vast majority of calls are written by the big spec funds. Look for higher prices Sunday evening on beans, corn and probably wheat just to compensate for the funds market manipulation yesterday and today.


 

Put Option Discussion Continued

September 2022 CBOT wheat futures price was down 20 cents yesterday and settled at $10.75¼.

The $10 September wheat put premium should have increased 6½ cents (delta times 20 cents). However, it increased about half that much. See the price chart below.

The $9 September put premium should have increased by a little more than 3½ cents (delta times 20 cents), but it lost a quarter cent!

Clearly, the option traders are bullish wheat plus many traders realize that the big spec funds are trying to muscle the May futures lower by the close today to make as many call options as possible expire worthless.

Why do big spec traders want to make as many call options as possible expire worthless? Most of the options purchased are by small traders and they buy them from some body and that somebody is mostly the big spec funds, who are comfortable taking the margin call risk of writing an option; that is to say sell an option they have not already bought.

Usually, there are twice as many calls on the books as puts. People just cannot get comfortable buying something (a put) and wanting the futures price to go down. What they just cannot get comfortable with is wanting futures to go down so their put premium will increase. Therefore, the big spec funds want to push the futures price down the few days before the options expire. Ideally, on option expiration day, they want the settlement futures price to be dead on a strike price so the calls and the puts at that strike price expire worthless.

Pay attention to this:

All option buyers have limited financial risk and unlimited financial gain opportunity.

All option writers (sell before they buy) have limited profit potential and unlimited financial risk.

And that, Ladies and Gentlemen is why the options are so expensive. They are so expensive that we began applying writing options as part of our market plan for our clients who can grasp the concept of writing options. For example, if a farmer who grows corn, he is long corn in the cash market. But someday, he has to sell that corn. Most year’s $7 is a good price for corn. We have a client who wrote 40,000 bushels of $7.00 December 2022 corn calls and received 58 cents.

Let this soak in: somebody paid our client 58 cents a bushel to have the right to make that farmer sell the option buyer 40,000 bushels of corn at $7.00 HTA for new crop 2022 corn.

No matter what happens in the market, the farmer keeps the 58 cents if he hangs onto the position until expiration day, November 25th. The farmer may or may not have to sell his corn at $7.00 HTA. With the 58 cents premium paid, the net HTA price would be $7.58. How bad is that? If the farmer does not have to sell corn at $7, he still keeps the 58 cents. How bad is that?

The past couple months we have had clients:

Write $20 May CBOT wheat calls for 38 cents… Some idiot paid some of our clients 38 cents for the right to buy May wheat futures at $20. How bad would it be sell wheat at 20? And still keep the 38 cents?

Write $6.30 December short dated corn puts for 10 cents. If December corn futures closes below $6.30 today, our client will have to buy corn futures at $6.30. Given that December corn is at $7.30 right now, our client will just have to be content to keep 10 cents a bushel on 40,000 bushels.

Another client wrote 10,00 bushels of December $6.40 short dated puts for 13 cents a bushel.

Another client wrote an $8.00 May corn call for 4 cents. May corn was $8.14 yesterday, but now it looks like the specs will push it down to $7.90 by this afternoon. If so, the client made 4 cents without selling May corn at $8.00. Is that good or bad?

A client wrote a May crude oil $82 put for $1.17 back in mid-March. May crude oil quit trading last week and never got close to $82. The client made $1.17 on a thousand barrels of crude. $1,170 will buy a few days’ worth of diesel fuel.

Just a few days ago, a client wrote a $120 crude oil call for $3.11 per barrel on a thousand barrels. He could buy that call back for $1.16.

Another client wrote a $7.00 December 2022 call for 68 cents on 50,000 bushels. Again, somebody paid the farmer 68 cents for the right to possibly make this hardworking farmer sell his corn this fall for $7.00. Farming is really tough, but not every day.

The next time anyone says they lost money trading options, ask them: “Did you buy ‘em or write ‘em?” Guarantee they will say they bought the options and 95% of them were call options. When the price is high, we like buying puts, but unless the price is well below breakeven, we generally do not recommend buying calls.


Here is your option question for the day: If a corn farmer buys corn puts to lock in a floor price for his corn, does he want those puts to make him money?

Take a look at several interesting charts. Soybean export sales for last week were 16.9 million bushel. All we need each week to meet the USDA export target 2.2 million bushels sold.


 

Weekly Export Sales Update


 

Market Data


This morning: Crude oil is at $103.02, down $0.77 The dollar index is at 100.86, up 0.28 July palm oil is at 6,261 MYR, down 52. The contract high was made April, 20th at 6,546 MYR. Palm oil owns 36% and soybean oil owns 28% world market share. December cotton is at $119.65, down $0.53 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 $7.157, down 0.032. The contract high was made April, 18th at $8.279. Natural gas is the primary cost to manufacture nitrogen fertilizer. July ULSD is at $3.4676 per gallon, down 0.0117. 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 2 less rain days in the 10 day forecast than yesterday and the Eastern Corn Belt has 1 less rain days than yesterday.

Explanation of Rain Days


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