Grain marketing in baseball terms

first_imgShare Facebook Twitter Google + LinkedIn Pinterest Corn continues its sideways trade since harvest. Some have suggested that a chart pattern may signal a small rally in what is still a long-term bear market. However, the rally may be limited to just a dime near term. Longer term weather will be the biggest factor.Reports indicate U.S. corn is competitive globally (which is good), but buyers are limited. There was some bearish news last week, reports say South American feed wheat works into the U.S. Southeastern feed markets. This could displace domestic corn usage and contribute to larger carryout, ultimately keeping a lid on prices.World stock levels are at record levels for corn, beans and wheat. This will ultimately keep prices stable until more is known about summer weather conditions in the Northern Hemisphere. Now is the time to identify your price goals and timing. Having your goals written down now helps reduce emotional decisions in the future. Many producers will remember 2012 prices with fondness, but 2015’s devastating market action crippled many farmers’ bottom lines. Producers had the chance to sell grain at profitable levels, but many waited too long either because they wanted to see what they would produce or for a further price increase that never happened.Market ActionTwo Calls ExpiredFriday 2/19/16 was March option expiration day. I had 2 different calls placed.5 months ago on 9/15/15 I had sold a 4.20 March call for 18.75 cents.2 months ago on 12/09/15 I sold a 3.90 March call for 8 cents.Both of those expired on Friday worthless because the price of March corn ($3.66) was below the strike prices I originally sold. This means I get to keep all of the premium but none of my grain is priced yet.Sold Three More CallsSince I think corn prices will continue to trade sideways, I sold another 3 additional calls. On Friday I sold:1 – May 3.70 call for 10 cents1 – July 3.80 call for 15.5 cents1 – Sep 4.00 call for 18.5 cents.This Means:If the market is below these prices at option expiration I keep the premium again, but haven’t traded any grain.If futures are above, then I have put a cap on the price I will trade the grain for at the strike prices, but I get to still keep the premium.In all three case I still have the opportunity to then “roll” the sales from May, July or Sep to Dec futures for additional spread carry profits of nearly 15 cents on average. Those Prices Don’t Look SpectacularOn the surface that may seem the case, but when ALL the premiums are added, prices look better:Add the premium I sold on Friday (.10, .155 & .185)Add the premium that expired on Friday above (.08 & .1875)Total Prices:3.70 + .10 + .08 = $3.88 May3.80 + .1875 + .155 = $4.1425 July4.00 + .185 = $4.185 SepAlso, in all three cases I still get to add the market carry spread (difference between current month and future month) to “roll” these sales to Dec futures. Right now the average for May, July and Sep spreads to the Dec futures is around 15 cents. That would mean my corn if sold would have an average at $4.20 futures for these 3 calls.Grain Marketing in Baseball TermsLast year the KC Royals led the league in the fewest strike outs — 15% less than any other team and 30% less than the league average as well as the NY Mets they faced in the World Series. The Royals dominated the series (4-1). Interestingly, they hit 30% fewer home runs during the regular season than the Mets and were in the bottom 25% of the league overall for home runs. Similarly the year before (2014), the Royals had the fewest strike outs AND home runs in the entire league when they made it to the World Series losing to San Francisco in Game 7.Too many farmers try to hit “home runs” with their grain marketing instead of trying to “just get on base.” Striking out is similar to leaving no chances open for opportunity. Getting on base means leaving room for many opportunities. Games aren’t won with just one good player hitting a home run. It takes the whole team, planning, discipline and execution.For example, I view selling calls like bunting. The options that expired on Friday helped “get me on base.” The options I then sold on Friday helped “advance the runners on base.” If prices remain steady (or even increase a little) the spread carry will drive the runs and score prices that look good for 2016 by today’s standard. As shown in the example above, if corn continues to trade around $3.80 throughout summer, my average sale on these contracts would drop from $4.20 to only about $4.15. While it’s not guaranteed (selling calls provides no floor protection for unpriced grain), it provides some limited downside protection, but no more than the value of the call I sell vs the price of corn on the day I make the sale.It’s important to note, these calls represent only about 25-30% of my expected production. I hope the market rallies because I would still have 50% of my 2016 crop to sell. But, I’m not going to just sit around waiting and hoping for a home run to win the game in the 9th inning. I’m going to take a lot of singles throughout the marketing year and hope it’s enough to help me win the game at the end of the season.In terms of the grain marketing calendar for the 2016 production, it’s the bottom of the 2nd inning and the heart of my batting order is up. I have my game plan in place and I’m ready to take advantage of opportunities in the market while capitalizing on other’s mistakes. I encourage farmers to hit singles when they can by getting their grain marketing plans organized now. Don’t wait until the 9th inning hoping for a home run that may not happen.Jon grew up raising corn and soybeans on a farm near Beatrice, NE. Upon graduation from The University of Nebraska in Lincoln, he became a grain merchandiser and has been trading corn, soybeans and other grains for the last 18 years, building relationships with end-users in the process. After successfully marketing his father’s grain and getting his MBA, 10 years ago he started helping farmer clients market their grain based upon his principals of farmer education, reducing risk, understanding storage potential and using basis strategy to maximize individual farm operation profits. A big believer in farmer education of futures trading, Jon writes a weekly commentary to farmers interested in learning more and growing their farm operations.Trading of futures, options, swaps and other derivatives is risky and is not suitable for all persons. All of these investment products are leveraged, and you can lose more than your initial deposit. Each investment product is offered only to and from jurisdictions where solicitation and sale are lawful, and in accordance with applicable laws and regulations in such jurisdiction. The information provided here should not be relied upon as a substitute for independent research before making your investment decisions. Superior Feed Ingredients, LLC is merely providing this information for your general information and the information does not take into account any particular individual’s investment objectives, financial situation, or needs. All investors should obtain advice based on their unique situation before making any investment decision. The contents of this communication and any attachments are for informational purposes only and under no circumstances should they be construed as an offer to buy or sell, or a solicitation to buy or sell any future, option, swap or other derivative. The sources for the information and any opinions in this communication are believed to be reliable, but Superior Feed Ingredients, LLC does not warrant or guarantee the accuracy of such information or opinions. Superior Feed Ingredients, LLC and its principals and employees may take positions different from any positions described in this communication. Past results are not necessarily indicative of future results. He can be contacted at [email protected]last_img

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