Analyst: Be Ready to Sell Puts

Corn prices have been in a deep slide for the last six weeks, with a new contract low established under $3.30 on December futures this past week. Expectations for a record crop and good weather in the forecast, as well as weakness in wheat and other competing commodities, have helped to push corn prices lower. There is little doubt that this year’s crop could be significant in size and likely record large. Yet some studies are beginning to surface that would suggest, in a year with high heat and challenges along the way, yield may be less than expected.
 
Wherever yield finally ends up, it will set the tone for projected carryout. The market will likely recognize ample inventory and not be in a hurry to move higher, and there will be a point where prices just won’​t move any lower. We reflect on two big sell-off years (2008 and 2014) when prices reached their bottoms and began to move higher. In 2008, prices on December futures dropped under $3.00, and within six weeks, were trading back over $4.00. In 2014, December futures bottomed at $3.18, and within 30 days, were trading over $3.80. Our point is that farmer selling after harvest is likely to be near zero. Most will likely tuck corn away into storage and, if need be, take a loan. The backdrop to a recovery in the corn market is a shortfall of inventory out of South America, in particular Brazil, which may end up being an importer of U.S. corn.
 
Prices have gone low enough that you may want to look at exploring opportunities to sell put options. When selling puts, profit is fixed and risk is unlimited. Yet, we believe that selling March at $3.00, $3.10, or even $3.20 puts will have high odds of expiring without value. Expiration date is February 24. By then, it’s highly likely that the corn market will have already recovered above $3.50 (or perhaps closer to $4.00) in an attempt to ensure it buys acres for next year, and pull corn out of farmers’ hands. Also, it is likely the market may factor in weather premium for the Southern Hemisphere growing season.
 
What if corn prices are lower in February than the strike price sold? Whoever owns that put will exercise it at expiration. You will be assigned a long futures. As an example, if you sold a $3.20 put in March for 12¢ and this was exercised, you will be assigned a long futures at $3.20, and you collect the 12¢. This puts your breakeven at $3.08 before commission and fees.
 
Selling premium is a way to try and add value to bushels that have already been sold. If the option is exercised, you will retain ownership at a very low level. If the futures price is above the strike price at the last trading day, you collect the premium and add this to the value of bushels that were previously sold.
 
If you have questions or comments, or would like help in creating a balanced strategy for your operation, contact Bryan at Top Farmer Intelligence (800-TOP-FARM ext. 129).
 
Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.

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