Watch for Corn Put Selling Opportunity
The recent sell-off in the grain markets has been disappointing for producers. Yet, behind every market move there is a silver lining and opportunity. It is about perspective and willingness to accept where the markets are and looking for opportunity. Prices have slid much further and faster than anticipated, since peaking just prior to the Memorial Day weekend. The recent turn down reflects good weather, technical selling, and concerns over trade and tariffs. Managed money was aggressively long futures, and since early June have exited and are now net short. Yet, despite an earlier-than-expected price decline, the seasonal price pattern (for the most part) is intact. That is, prices tend to move upward throughout the spring months and decline in June or July if planting and early growth are on pace. Grain prices have moved down to levels that could suggest we are already pricing in a large crop, and there is limited downside.
As disappointing as the market is for producers, end users are getting a bargain. Prices have dropped low enough that long-term buys are recommended. What is considered a bargain? A bargain would be buying commodities below the cost of production, even if it is still early in the growing season, before the crops are made.
From a corn producer’s perspective, if you sold on the rally this spring, you may now be in a position for reownership strategies. One strategy, while not a direct reownership, is to sell put options in March corn. This strategy would provide for the collection of premium (put expires worthless) or be assigned long futures at a price lower than where futures are trading today, with premium collected. If corn prices are in the lower one-third of the market move for the season, we doubt highly that March corn (currently priced at $3.85) will be below $3.60 come February. Consider selling the March $3.60 corn put. As of this writing, this would suggest another 25¢ down on futures. The only variables we see to make this occur are an even larger crop than currently expected and lower demand. We believe neither will occur, as end user buying remains strong and the recent pullback in prices should keep a vibrant demand market intact. This month’s Supply and Demand report indicated a 24-year low of world corn stocks to usage. This is a very supportive macro-argument that corn prices are likely undervalued.
By selling put options, you are looking to collect the premium of the sold option and accepting risk. The risk is in the form of potential margin calls and the chance this option will be exercised, which means you are assigned a long futures at $3.60. Given the cost of producing corn, it seems an acceptable risk to own corn at $3.60 March futures in late February. Keep in mind, you keep the premium, which is currently near 14¢, making your breakeven on the position $3.46 (less commissions and fees). If futures are above $3.60 at option expiration, you collect the premium and can add this to your bottom line (less commissions and fees).
If you have questions or comments, contact Top Farmer at 1-800-TOP-FARM, ext. 129.
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