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Market Strategies to Use With Limited Price Movement

On February 8, corn traders and producers got the news they’ve been wanting to set the stage for prices to run higher. On that day, USDA’s Supply & Demand Report showed a reduction in corn yield of more than 2 bushels an acre. The yield figure was lower than expected. In theory, this could reduce carryout by up to 100 or 200 million bushels. However, the same report also reduced feed usage by 125 million and ethanol production by 25 million. The net result was slightly supportive, with very little change in projected carryout at 1.735 billion bushels for the 2018/2019 season. This compares to the previous estimate of 1.781 billion from November. A year ago, the estimate was 2.140. So, while corn carryout is 405 million bushels less than a year ago and stocks to usage at 11.7% vs. 14.5%, corn prices have struggled since the report, losing about 10¢.

For the most part, prices remain rangebound. The question everyone is asking: How can you make money in an environment where prices are not moving? Production in recent years has created just enough excess inventory that end users remain hand-to-mouth for their buying practices. The dilemma most farmers currently face is that prices are not high enough to sell, especially for this time of year. That makes the apparent solution to store old crop and wait to make new-crop sales. Or, are there other answers or strategies to use?

Consider what we would term a more advanced strategy that utilizes options. A short option strangle is where you sell both a call and put. The strike price for the sold call would be above the market price, and the strike price for the sold put would be below the market. You collect premium on both options. At expiration, if the market is between the strike prices, the value of these options will be zero. That means you keep the premium you collected. The short option is marginable, meaning the exchange will assign a value due in your account to hold them. The value due (the margin call) can increase or decrease depending on market movement. Should prices rally above the sold call strike price at expiration, you will still collect the premium of both options and you will be assigned a short futures at the sold call strike. Is this a win-win for you? We believe so. You win by collecting premium and selling corn at a higher price. The corn in your bin gains value. Should prices drop off, you collect the premium on both options and could be assigned a long futures at the sold put strike price. In this case, you are long futures at the sold put strike price minus premium collected.

Another more advanced strategy that producers can consider is to buy an at-the-money put and sell two out-of-the money calls in December corn. By selling calls you are attempting to finance the cost of the put. This is a marginable position and has unlimited risk. However, for the calls to gain value, this means that unpriced corn can appreciate up to the sold call strike prices. Beyond the strike prices, you could be hedged on two contracts at expiration.

These are but a couple strategies that, if employed, could either add value, hedge new crop at higher prices, or retain ownership. Be sure you understand all ramifications in your strategy, whether the market moves higher or lower. Cash flow, margin call, and emotion all have to be considered before entering such strategies. Yet, in a low-volatility environment, using more aggressive strategies may help improve your marketing results. 

If you have questions or comments or would like a strategy design for you, contact Top Farmer at 800/334-9779, 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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