Back in December, I outlined a plan to sell wheat puts as a means of adding some price to your corn. The strategy was to take advantage of an extreme low value of wheat to add some premium to your corn marketing. I recommended selling the $4.30 March put which allowed you to collect .35 cents on every bushel of corn you planned to grow. When the options expired Friday, March wheat was at $4.31, which meant you were able to keep all 35 cents. This will be added to the corn track record for 2017.
This I am told all the time that given the level of corn and soybean prices, it will be hard to break even this year, in particular with corn. I am probably the only crop insurance agent in Kentucky who is also a licensed broker, so I am able to advise with this problem.
If you take an RP crop insurance policy at the highest levels, you're probably going to be below your break even should there be a revenue event which causes a crop insurance claim. As I write this the base price for corn is $3.97 and $10.19 for soybeans. This means that given yields which match your APH, you won't trigger a revenue loss until corn reaches $3.38 or soybeans reach $8.66.
A higher floor can be achieved through placing a 3 way option spread on top of your crop insurance policy. An added benefit of this spread is that it is effective regardless of what your yields are. In other words, if you grow 200 bushel corn and the fall price for corn is $3.38, you are not going to collect a crop insurance indemnity but you would have a sizeable gain in your commodity brokerage account.
In the corn and soybean charts below, I have explained the costs for a December three way spread for corn and for July and November spreads for soybeans. The July corn spread was actually more expensive than the December spread, so I did not list that.
On the top right, there is a red horizontal line which marks a ceiling. This shows the maximum price level you can achieve using this strategy because you would sell call options to help reduce the cost of the spread. On the bottom right, the blue horizontal line shows the estimated floors, which also happen to be below the contract lows. This floor was placed here because your crop insurance policy would kick in below this point. This is the put which we sold. The horizontal lines near the center of the page show where the floor is from the options after the cost of the spread is subtracted.
You could remove the call leg of the spread if you want a scenario where you can achieve unlimited prices for your grain, but it would add significantly to the cost of the strategy.....lowering your guaranteed floor. The trade off is that you have a reasonable cost of managing your risk while limiting the upside.
These charts explain the premise for how these strategies help, but the values change every day with the market. The call leg of the spread means that the position is marginable. If/when prices move higher, you will have margin calls. You get the margin back up to what the ceiling price is at expiration however. Believe me, you will profit most if you are having to meet margin calls. You will want margin calls.
This is the kind of strategy where your banker should probably be informed and educated. Share this post with your banker if this strategy appeals to you. I am available to help explain to you or your banker.
If you need a brokerage account, go to this link. There is no cost to open the account. I recommend opening an account and having it ready. When you are ready to pull the trigger is not the time to try to open the account.
As I have been writing now for months, the dollar is in a multi year cycle decline which will be a good thing for the grains. Just today, the dollar appears to have reached its daily cycle peak, completing the right shoulder of what I think will be a head and shoulders top. If that completes, the dollar should reach 96. That is even lower than what I had suggested on my last post.
If corn had any concerns of a rising dollar, it has not shown it. Corn held strong over the past couple weeks, and today pushed higher as the dollar finally showed some weakness. If the dollar manages to reach 96, I am beginning to believe corn could go a further than the $4.09 number I have written about several times.
Sentiment levels on corn have now reached the highest levels of optimism since late last June, but it currently stands only at 50%. There is still a lot of room for corn to move higher. I probably will recommend selling some $4.09 corn, but not as much as I was planning to a month ago.
Soybeans have also shown strength through the recent dollar strength. Again, don't be laughing about $11.00 soybeans. Beans closed at a new contract high today, and like corn the optix are only at 50%.
Crude oil has now been stuck in a 6% consolidation range for 51 days. That is a typical length of time for a typical oil cycle. Oil is in the timing band for a yearly cycle low, so I still expect a move into this low to be big. Its just not happening as I planned. I think the strength of the stock market has helped keep oil prices supported, despite recent buildups in inventories.
Hard to believe it has been over two weeks since my last post. There have not really been any sort of movements to comment on. The February unemployment report came and went and brought with it a small bounce in the dollar like I suggested it might. It was just enough to break the daily cycle trend line but as of this writing does not appear like it will close above it. None the less, it does confirm that a new daily cycle began on February 2, and will likely proceed in a left translated manner. This next cycle should break the intermediate trend line around 98. I hope to have sold significant amounts of physical corn and soybeans by then ahead of the planting intentions report.
As I have been warning, the dollar is declining into a multi year cycle low which probably will not bottom until sometime this summer. Fundamentals and weather will dominate the grain markets at that time, but for now, as long as the dollar continues this decline, grain prices should continue working higher.
This trade has nearly worn me out. Some of my brokerage customers had stops triggered and declined to re-enter. I have been sticking it out, and was happy that oil finally appears to be breaking down. Its really been the safest position to trade, although I have been talking this for nearly two months now. According to Sentiment Trader, oil is at the highest risk of any major asset they follow. I expect oil to move into its yearly cycle low.
The besides the emotional strain of shorting an asset which just won't move lower, the real consequence is that it allows extreme bearish sentiment to be less extreme. It allows the moving averages to catch up, and it lessens the profit potential of a trade. This trade will work, but the time it is taking to develop has taken some icing off the cake. Thankfully, there is still plenty of cake. The time has probably cost this trade a dollar, which is 5.6 cents per bushel of the synthetic corn position.
Today, the December corn contract closed at the highest level since June 27. We now have a contract which has broken (barely) above its congested trading range of the past month. It has also closed above its 200 day moving average. Technically, corn appears poised to make a bit of a run. I said last month that the decline in the dollar would reward corn with a nice pop. This will be the pop.
I said a pop, not a bang. I really don't expect something crazy here, but an advance to the 78.6% Fibonacci retracement seems reasonable by months end. That would be at $4.09.
When corn reaches that level, we may have extreme bullish sentiment, but we will certainly set up a sell signal with the CCI.
I recommended selling March wheat puts back on December 7 and collecting .35 in premium. To keep all the premium we collected, we need wheat to close above $4.30 by February 24. This was done in a synthetic way to boost revenue for corn.
It is hard to believe, but there is still room for soybeans to move higher from here. I suggested back on November 28 that $11 soybeans were not out of the question. Sentiment readings are presently at extreme pessimistic levels. If November bean prices can break above $10.40, they would only need to run 56 cents more and we will be at the next Fibonacci level, and there is no resistance between here and there. Again, the drop in the dollar is all the fuel soybeans need to do this. Speculators do not like being on the wrong side of beans when they begin a rally. If you have not sold any beans, just stay put and see if this develops.
If you followed my recommendations to the letter thus far, you would be 50% sold at $10.05. With the conditions which I just explained, I would rather not be sold at all, so I am buying back my sales on paper using a bull call spread, and I am recommending that you do this as well. I am recommending buying the $10.60 call and selling the $11.20 call. This is a non marginable trade which will cost around .15. The maximum gain on this position would be .45 net. The position would expire March 24, just ahead of the planting intentions report. If the position maxes out, it would get your 50% sales price increased from $10.05 to $10.50.