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I Have Some Unsold Bushels of Corn Now What?


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Strategy of the Day 1.23.2020

I Have Some Unsold Bushels of Corn Now What?

March 2020 Corn futures are trading up 4 cents as of writing this report, poking through the key 392.25 prior highs of January (and the resistance found from the high of the November WASDE report).The rally was sparked on the announcement from the USDA of the sale of 284k tonnes of corn, which is continuing to support the strong export market (and translating to strong / stable cash basis nationwide).If you are like many of the producers I have talked to, there is a good chance you are still hanging onto some of your old crop corn waiting for what you know to be coming.So, prices are improving, now what?

Picking a time to sell is the objective of the game, but it also happens to be the hardest thing to do.It sounds easy enough; you will just wait for the higher spring prices but pulling the trigger on that sale (dont be greedy!)as well as knowing when its the right time ends up being the pitfall for most producers.That is why it is important to consider strategies that utilize time to your advantage and position a head of marketing decisions with your cash crop.In the traders tool belt, selling options to collect premium (time value) creates a diverse risk perspective that can isolate the passing of time.Sounds fancy, and it is but mastering the option strategies designed for certain market conditions can liberate a trader to design strategies for specific risk needs.

In this case study, let us assume the producer in question is sitting on 5000 bushels of unsold old crop corn (this is easily scalable to any size as its one contract in the futures market).The producer has two basic choices ahead of them at any time, sell my corn now or store it for better prices in the future.The futures board is used to mitigate that risk, by creating a derivatives marketplace for the future delivery of corn.The contracts at the board, offer a wide array of risk management tools, and below I will be presenting two options strategies (below) that I believe to be a good risk management solution for producers.

From a technical perspective March 2020 corn futures are trying to breakout of the January highs, with current high of the day at 393.75.This makes for a second day of higher highs and higher lows since and inside day (after the large reversal last Friday).There is a downward sloping trendline that is also now breaking (yellow dashed line on chart), which I believe is the first indication of a more significant reversal to test the $4.00 handle again for corn.The November highs of 400, the October highs of 411, as well as the 420 full 50% Fibonacci retracement inflection zone would be the next logical targets for upside price discovery, if March corn can hold above the January 392.35 resistance level.Check out the two strategies listed below for more insight on how I am managing risk through execution in these markets!

March 2020 Corn Futures 240 min Chart

Strategy One:

Lock in cash basis by selling the old crop bushels and re-own the bushels on the board through July option expiration. This strategy is for anyone looking for re-ownership of their old crop corn through July. The strategy can be changed to have finite risk, by removing the short 380 put, if you are looking for even less risk on your re-ownership strategy.

BUY JULY 2020 CORN 400 CALL for 18.875 cents cost

SELL JULY 2020 CORN 450 CALL for 5.875 cents credit

SELL JULY 2020 CORN 380 PUT for 8.125 cents credit

Net cost: 4.875 cents ($250) to enter position, plus margin for holding the 380 put

Risk: Being put long July corn at 380, the 400/450 call bull spread as finite risk on its own; therefore the management must consider the 380 put and potentially cover or roll this put lower if the price of corn drops and the trader does not want to be long July corn at 380.

Strategy Two:

Continue to store bushels of old crop, use the board to buy option protection (financing some of it by selling premium). This strategy is for those looking to put a floor in price on their stored corn; but also allow for some price improvement by selling the out-of-the-money call.

BUY JULY 380 PUT for 8.125 cents cost

SELL JULY 450 CALL for 5.875 cents credit

Net Cost: 2.25 cents ($112.50), this also the max risk on the risk-reversal spread as it has finite upfront cost.

Risk: Finite risk in futures account to downside, and floor in price at 380 Put; risk being called away (and assigned a future position short) at 450 in July corn

For more information, or if you have any questions regarding these ideas; Dan can be reached at (312)277-0110,dhussey@zaner.com, or on twitter @DanielHusseyJr with any question or further comments!

Get all of Dans commentary, as well as the entire Zaner Ag Hedge teams thoughts:

http://www.zaner.com/landing/ag_hedge_newsletter.asp?AP=DHUSSEY



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About the author


Dan began his career in 2006 as an arbitrage and clearing clerk for Spyglass Options in the Eurodollar futures options pit on the floor of the Chicago Mercantile Exchange. Taking his employing brokers advice, Dan soon left the floor to pursue a career “behind the screens upstairs”, as there was an inherent lack of opportunity for market making in open outcry pits. After graduating from the University of Notre Dame in 2009 (and for the subsequent 10 years), Dan leveraged his IT background in networking and computer programing to begin developing computerized trading algorithms and trading systems for multiple private equity firms and his own account. He eventually found his specialization in trading carry trade dynamics in currency and interest rate futures; while simultaneously building his experience in trading both inter-market and intra-market spreads. His trading experience later expanded to include most commodity spreads, with an emphasis on carry trade economics in agricultural commodities. In 2016 Dan decided to take his career full circle by becoming a series 3 and 34 licensed broker; and expanded his outreach to the agriculture production community. In 2018, he joined Zaner Financial Services Ag Hedge division, bringing his knowledge and expertise of carry trade economics and continues expanding exposure to spread markets. Dan can be reached at (312)277-0110 by phone, @DanielHusseyJr on twitter, @DanSOTD on facebook, and emailed at dhussey@zaner.com.
 
 
Contributing author since 2/15/2019 

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