Analyst: Giving Stored Corn a Pay Raise
Many producers are holding grain in storage, particularly corn, which remains in a price pattern that is rangebound. After tucking away this year’s crop in September through early November, many farmers are not inclined to begin moving grain out of storage unless there’s a financial benefit. Yet, with an increase in carryout on the November Supply and Demand report, significant rally potential over the next one to two months is likely limited. Of course, there is a chance of weather scenarios developing in the Southern Hemisphere. Assuming they have mostly normal weather, corn prices will likely continue to remain trading in a sideways pattern, as the market views near-term supplies as adequate. As time progresses, however, the supply pile will begin to dwindle, and corn prices will likely need to move higher. Weather uncertainty will provide support, yet that is probably months away. Until then, consider a strategy to collect premium.
The strategy that we will focus on today is called a strangle. This is an option strategy in which you sell both a call and a put. Both are out-of-the-money. As an example, if you sell a May $3.90 corn call for 10¢ and sell a May $3.40 corn put for 10¢, you stand to collect 20¢ of premium. This full collection of premium occurs at option expiration in April if May corn futures are both below $3.90 and above $3.50. Regardless of where futures go, you collect premium. Your breakeven is $4.10 or $3.30 (less commission and fees). May corn futures have not been as low as $3.30 this year, so we would view this as a good long-term buy if the short put is exercised. We believe this would be a good spot for re-ownership of corn that was forward contracted earlier in the year. On the other hand, should corn prices rally, we view the $4.10 figure as an area where corn prices are not likely to move much above between now and April. If they do, you’ll stand to be hedged at $3.90 with the collection of 20¢ (less commission and fees). We would term this as a “pay raise” for corn in storage.
Should corn prices continue to remain in a range between $3.50 and $3.90, time will erode the value of these calls, and consequently, will provide you premium in which to help pay for the cost of storage.
As with any strategy, there is a cost as well as a risk. Make sure you are clear on these before implementing.
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.