I just wanted to recap the grain sales we have made up to this point.
We completed all soybean sales in June which I re-capped on June 21. We averaged $10.61 for our efforts. No further sales have been made.
On June 8, I recommended selling 10% of the 2017 soybean crop at $10.05.
The corn marketing has been much more challenging. Although I was anticipating a powerful move to the upside, I did not anticipate a crop size as was being predicted which sent corn into a death spiral. There were several mistakes I made which made the task of marketing the corn more difficult. This is why a brokerage account is important. I like using brokerage primarily as a means to cover mistakes on the cash side.
Back on June 10, I recommended placing an order to sell 25% of your corn at $4.45. This order was hit. Mistake #1 was that I did not recommend selling 100% of the corn. Mistake #2 happened on June 23 when I recommended lifting the hedge. The hedge did net .10 per bushel, but could have yielded so much more.
On June 23, I recommended selling $4.00 corn puts as a way to add some premium to your pocket. Again, this would be a mistake. I believe corn will continue grinding higher as I have contended all along, but by the time the puts expire, I doubt they generate much in the way of revenue. We have to wait until November 18 before we will know for sure.
On August 30, I called the bottom in corn and recommended re-ownership on paper. This would pan out to be a day early, but within a penny of the bottom. Rather than claim re-ownership however, we took a long position in oil to mimic what would need to be done to gain .84 in corn..... enough to get the cash price back to $4.00. This would mean that oil would need to reach $50.50 which happened on October 10. I recommended this because the fundamentals of corn were extremely bearish, while the fundamentals in oil were bullish. To a greater or lesser degree, oil and corn tend to trend together.
We still have physical bushels to sell, and we still have puts which we sold before making any final tally's on price. What we do know is that my recommendations gained .10 from the June hedge, plus another .84 from the synthetic long, meaning we have .94 to add to the final corn price. My target is at $3.65, which if hit means the total net price for corn would 3.65 + .10 + .84 + .05(remaining credit from the puts we sold) = $4.64. That would be a great price despite the mistakes which were made along the way.
Unfortunately, we did not get any 2017 corn sold so far this year.
Yesterday, I outlined an option strategy on the opportunities page to provide some protection against a potential leg lower the market could make. I wanted to discuss the option strategy a bit further to attempt to better explain some things about taking that position. Here is why this position makes sense to me.
This position could be used as a cross hedge. By this, I am saying that you could hedge corn and wheat using soybean contracts. With the charts below, I am attempting to diagram that corn for the most part is grinding lower. In addition, it is .63 below its 200 day moving average. It has traded that wide 4 previous times which was followed by a counter move. Any move lower would be very limited. In addition, this contract has never traded lower. I also believe wheat looks more like it could have a small bounce.
Soybeans are at their 200 day moving average and an area of support. This is an actionable place professional traders would look at to take a position because there is room for it to move.....higher or lower. There is a lot of room lower this position could go. If that makes you uncomfortable, then buy the option. My outlook improves a lot after one more move lower.
If prices move lower, we would leg into a bear put spread reducing cost. I am more bullish in the longer term, so capping the downside on the beans at .80 - $1.00 does not add much risk to the position. This will NOT make the position marginable.
If prices rally higher, we will sell the put we bought to collect back unearned premium. I am never married to a position. The purpose of this trade is to provide protection against a rising dollar pressuring commodities should they announce some tapering of the quantitative easing program. Should they expand the program, you could see further declines in the dollar and commodity prices rise.
I blew blew it. That will never happen again. I left a crop largely unpriced in front of a major market moving report. The quarterly stocks report for corn was the biggest miss by the trade in report database history at 396 mb more corn then the trade expected. The second closest was 310 mb dating back to March of 1989 following the 1988 drought year. Yes, the adjusted stocks number came out of nowhere and nobody saw it coming. But Isn't that what insurance is for? To protect against things you cannot see?
With the benefit of hind sight, I can clearly see what should have been done. I still would not have recommended heavy cash price sales, but would have instead protected the crop with a low cost put option strategy which would have set a floor. This could have been done for around .16-.17 cents per bushel for near month ATM puts. In hind sight, a bargain. That would have been an insurance policy against an adjustment that comes out of nowhere.
Portfolio managers for major stock funds employ this strategy all the time. The use of put options in front of earnings reports is done to spare the tax consequence of actually selling the stock. In stocks or commodities, you don't want to be stuck naked holding long positions when the funds become scared. The put option strategy is really the only way to play both sides in front of a report.
Moving forward, expect to see this option strategy recommended n front of all quarterly stocks reports. It has become a rule.