June 6, 2023
By Tommy Grisafi and Dave Lechtenberg
The July corn market fluctuated on Friday between $5.81 and $6.10, showing a 30-cent rally from the lows. It's important to pay attention to the grain calendar as the July contract will soon expire. Elevators and end users will soon be trading against the September contract. Currently, there is a significant 70+ cent difference between the two contracts.
Take a look at the markets and determine what basis will have to do to give us what we have today. To achieve the current prices, basis numbers for the river and ethanol plants need to be around $1.00-$1.20 above the September prices. One strategy to consider is to sell old crop corn and then repurchase it using a September $5.60 call option.
Similar to corn, unsold beans are also present in the market. July soybeans will soon move to the next contract month. August soybeans are currently trading 85+ cents lower than the July contract. September soybeans are worth $1.50 less than July, and it’s $1.60 less if you consider November. Sell these bushels now unless you are hoping for a rally, in which case you can consider owning calls instead. The set loss of an option is far less than the basis depreciation and market inverse.
The price of December corn rose from the lower $4.90s on May 18 to $5.48 on Monday. The market is being influenced by two opposing factors: the possibility of hot and dry conditions and the promise of future rain. Additionally, demand is a concern. This rally may be short-lived, and if the weather changes or if farmers withhold selling grain, the market could experience significant volatility.
When dealing with a weather-driven market, it's essential to determine whether you are a hedger or a speculator. As a hedger, a producer of the crop, you should consider grain hedges for protection. If corn prices rise, you can profit from long positions, whether they are physical grain bushels or calls. These profits can contribute to the revenue received from crop insurance. However, relying solely on crop insurance may result in a loss of revenue.
The American farmer will incur additional losses if the lack of demand becomes real. Even with a short crop, without proper demand, corn prices will drop.
There is a concerning number of American farmers with unprotected or unsold bushels. We see this at play through our elevator connections in our commercial division at Advance Trading. Elevators, which purchase corn from producers, have the option to sell it in the cash market or sell futures. This is a trackable position. The lack of commercial hedges speaks volumes to the lack of forward sales on new crop bushels.
This is not last year
It's important to change our perspective on the markets compared to previous years. The cost of not selling grain has increased significantly due to storage expenses, interest costs, and increasing carrying charges.
Buying put options on unsold bushels is a bullish strategy for producers, providing a safety net in case of adverse market conditions. It allows for protection and the possibility of selling corn at a higher price.
If a large crop is expected in the fall, we may encounter wider basis. This means the market will demand that corn is not brought all at once during harvest, resulting in lower prices or wider basis.
If your storage space is limited, hedging that space and being more aggressive in making sales is a smart marketing decision. Stay bullish and prepare to sell bushels that cannot be stored for 100 days until harvest.
Contact Advance Trading at (800) 747-9021 or go to www.advance-trading.com.
Information provided may include opinions of the author and is subject to the following disclosures:
The risk of trading futures and options can be substantial. All information, publications, and material used and distributed by Advance Trading Inc. shall be construed as a solicitation. ATI does not maintain an independent research department as defined in CFTC Regulation 1.71. Information obtained from third-party sources is believed to be reliable, but its accuracy is not guaranteed by Advance Trading Inc. Past performance is not necessarily indicative of future results.
The opinions of the author are not necessarily those of Farm Futures or Farm Progress.
Read more about:Grain Storage
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