Market Commentary for 7/31/15
The funds have been controlling the market lately. Corn rallied 90 cents and then fell 70 cents in the last two months as a result. Many farmers have a difficult time knowing what to do during these types of big swings. Many end up doing nothing, thinking the market will keep going up. Ultimately, many can be disappointed when inevitably prices go back down. However, if a farmer has a plan, they can take advantage of opportunities.
For example, I had a few new clients this spring who had nothing sold for 2015. They were concerned about making a profit at price levels during that time. Many felt corn may not trade above $4, let alone $4.50. At the time, we agreed on a plan together — Start selling 5% of their production at $3.75 futures and continue to make a sale every 10 cents that the market went higher.
Once corn started to rally two months ago, my clients began initiating the plan. They made 8 sales during the rally, representing 40% of their crop at an average price of $4.10. After crossing $4.25 and then $4.50 many made an additional sale because they hit additional goals they had for pricing grain. This gave them an average sale price of $4.15 on 50% of their crop.
As the market reached $4.50 many were worried they had made a bad decision to start selling their corn so early. Even I questioned if the decision to sell below $4 was the right thing to do. Many in the trade said $4.75-$5 was “right around the corner.” Then, over the last two weeks the market fell 70 cents, and EVERY farmer that scaled up their sales as I suggested was happy with their decisions.
No one knows were prices will go. This uncertainty leaves most farmers uneasy with grain marketing decisions, not knowing if what they are doing is the “right thing to do.” Often this uneasiness leads farmers to make no decision at all, which isn’t good either. There is no right thing to do, but having an action plan in place is a great start to get a farmer through difficult decision times.
Also, one of the benefits of having a grain marketing advisor, is having someone reminding you of your plans and strategies when decisions get tough and doubt creeps in. Several clients called me, uneasy with their decision. We talked about why we had picked the prices in the plan, and they felt more comfortable. With the recent drop in prices, all are relieved with their decision to stick with their plan.
Where can the market go now?
I’m going to make a prediction that in a week or two we will either start hearing “rumblings” of upcoming frost or there will be reports of crop tour yields below projections. It seems to happen every year. Either could cause uncertainty in the market and lead to price fluctuations. I suggest to all my clients to write down some price goals now and have them ready in case there is a rally. We’ve seen in the past what can happen during these rallies. Farmers can take advantage if they are ready and confident of the price they will sell. Remember, there is no guarantee that frost will happen or that crop tour predictions are going to be accurate.
Sophisticated grain marketing strategies can lead to profitable results. Following are two examples of recent trades illustrating my point.
– On 7/2/15 I sold a $4.50 call for 19 cents and on 1/6/15 I sold a $4.50 call for 30 cents. Selling a call is like putting a ceiling on my prices. But, I get to keep the money I sell the ceiling limit for — in this case, 19 cents and 30 cents.
With the recent drop in futures and the belief that a rally could be in store I bought back these calls for 6 cents each, meaning I made 12 and 22 cents respectively after including commissions.
– On 11/24/14 I sold a $4.70 call against Dec 2015 futures (on 5% of my expected 2016 production) and bought a $3.80 put for 1 cent. This trade gave me a $3.79 floor and a ceiling of $4.69 which was near where I had my 2015 crop sold previously. This week I bought the call portion of this trade back for 4 cents. This means, the ceiling has been completely removed from this trade and the floor was pushed lower from $3.79 to $3.75.
With the recent drop in futures I took the ceiling off of this trade just in case some of the predictions we have been hearing or will hear about in coming weeks come to fruition.
Options – reducing risk & adding profit
The trades above illustrate how farmers can use options to reduce their risk and pick up premium in the market at the same time. I know these types of trades are complicated to understand for farmers not currently doing them. But, the advantages of reduced risk and increased premium potential is worth it for farmers to spend the extra time to educate themselves. Working with an advisor who explains the process is comforting to many farmers wanting more sophisticated and profitable grain marketing solutions.
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