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Tidbits, Put Options, Markets & Rain Days Update 04/20/2022

Highlights


USDA announced yesterday morning the sale of 123,650 mts of old crop soybeans to unknown.

The crude oil complex was pressured yesterday after the Biden Administration announced they will resume selling oil leases on Federal Land, but very albeit on a reduced acreage and with a higher royalty charge.

Argentina’s soybean crop is 14% harvested.

There are 22 ships loaded with 644,000 mt of fertilizer waiting to unload at Brazil’s ports of Paranaguá and Antonina (Paraná) where the waiting list is now 60 days long. Port officials state, “Everything is normal.”

Actually, it is better than it was last year. More than 3 million mts of fertilizer were unloaded in the first quarter of this year, up 26% over last year. In March, the 867,900mts of fertilizer unloaded at the port was 20% more than a year ago. February’s fertilizer tonnage was 43% over a year ago at 1.3 million mts unloaded.

The US winter wheat crop condition is the lowest rated winter wheat crop for this time of year in more than twenty years. Now, before you mortgage farm and buy wheat futures, that is one of the reasons wheat is more than double its normal price. It is OLD news, it is already priced into the market.

Iraq has reduced irrigated 2022 crop areas to 50% of 2021. The USDA forecasts their 2022 wheat production at 3.25 million mts, way below 5.47 million mt of 2021.

China’s economy grew 4.8% in the first quarter of 2022 compared to a year ago and better than the 4.4% growth expected. From fourth quarter 2021, GDP rose 1.3% with only 0.6% growth expected. The stronger the Chinese economy, the more beans, corn and bean meal they will consume.

 

Put Options Lesson, part 4

September wheat settled at $11.05 yesterday, down 18¼ cents. On Monday the wheat futures price was up 22¼ cents, so the premiums of the puts were down. Yesterday, the wheat futures price was down, so the premiums were up.

Why?

A put option gives the buyer the right to sell wheat futures at a set futures price, aka the strike price. As the futures price moves lower, every put option increases in value.

The September 2022 $10 put gained $237.50 of value yesterday. If one had a short September futures position yesterday, he would have made $912.50. Which is better: making $237.50 or making $912.50?

No brainer, but there are other factors to consider. The big one being the owner of a put will never be asked to add money to maintain his option positon. A short futures position could require an unlimited amount of additional money because each day the futures closes higher, that many cents per bushel is transferred from the futures account which sold futures (short position) to the futures account which bought futures (long position).

Let’s say the futures price goes to $25 the first week of June like spring wheat did in February 2008. From yesterday's settlement of $11.05 to $25 is $13.95 per bushel loss times 5,000 bushels per contract = $69,750 of loss which must be replaced in the futures account penny for penny every day all the way up if one maintains that short futures position.

You already know the buyer of a put will never have to add money to his options account to maintain his option position. What do you suppose the right to sell September wheat at $10 is worth when the September futures price is at $25 the first week in June?

Not much, as in zip zero because no one would expect wheat to decline below $10 by August 26th when the option expires. Someplace along the way, a farmer or his banker will decide the short September wheat position needs to be liquidated to stop the mounting losses and the margin calls. Let’s say liquidation is done as $15.05. So, the loss on the futures from today to whenever the futures position is liquidated at $15.05 is $5 per bushel or $25,000 for each futures contract.

If a wheat farmer had sold the futures and then liquidated at $15.05, he desperately wants the price of wheat to continue higher. The worst thing that could happen to him is he loses money all the way up in the futures market, liquidates his short position at a loss and then wheat futures price goes to $6, where he might be selling his cash (physical bushels of) wheat before it goes lower.

He then subtracts his futures loss from the cash price he received for his wheat and there will not be very much left over. A sad story indeed and that is why we never recommend buying back a HTA or a Forward Contract when a futures price is making multi year highs. But sometimes, there is no choice. Grain merchandisers, as all futures traders know, it is possible for anyone to run out of money, including Cargill.

Ok, here is a question for you to ponder: if the September futures price goes to $25 in early June and then to $6 in late August, when did that $10 September 2022 wheat put option become absolutely, positively worthless?


 

Market Data


This morning: Crude oil is at $103.02, up $0.46 The dollar index is at 100.74, down 0.22 July palm oil is at 6,360 MYR, down 103. The contract high was made today at 6,546 MYR. Palm oil owns 36% and soybean oil owns 28% world market share. December cotton is at $121.01, up $0.06 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 $7.261, down 0.091. The contract high was made April, 18th at $8.279. Natural gas is the primary cost to manufacture nitrogen fertilizer. July ULSD is at $3.4209 per gallon, up 0.0015. 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 more rain days in the 10 day forecast than yesterday and the Eastern Corn Belt has 1 more rain days than yesterday.


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