By Dennis Smith & Pat Garrity | Grain PhD Ag Risk Specialists | Archer Financial Services Brokers
· Special corn report is now available
· More than 2 billion bushels remain in the field
· Possible downward revisions in the January report
· Protect against adverse weather in S. American and the U.S. next year
· Perhaps China will look to buy corn in the wake of a phase one agreement
The Corn market has fallen thirty five cents over the past 5 weeks after the front month December briefly penetrated $4. The December 2020 contract is trading at the contract lows and it has dropped about 20 cents since that near term high was posted in the middle of October. It has been a slow grind lower and the corn market has continued to lack a bullish catalyst to give it a much needed spark. Livestock producers may want to consider establishing a long term hedge against rising corn futures in the event a bullish scenario alters the outlook.
There are a couple different factors that could lead to a rebound and we believe locking in prices now while the market is cheap and relatively quiet could pay off down the road. It is always easier to establish this type of hedge while volatility is low as opposed to after a change in the fundamental landscape. We believe positioning in the options give livestock producers flexibility to adjust during the course of the year. We will be doing a 3-way option strategy which entails buying a call, selling a call, and selling a put to finance the call you own. We will be paying very little in premium to establish the positon and the margin to hold this option strategy is less than half of what it costs to hold a futures position.
With December 2020 corn futures settling at 393 ¼, we recommend buying the 400 call, sell the 470 call, and sell the 370 put. The premium paid is 2 cents ($100) per contract and the margin to hold this is $450 per contract. The margin rate is adjusted daily as the risk changes due to movement in the futures contract. The call you own is the closest strike price above the futures. You have a profit potential of 70 cents and it will cost you 2 cents to own up front. The risk on this position is the short 370 put.
It has been a late harvest this year at only 86% done as of Monday’s report with some more inclement weather approaching this week. Approximately 2.2 Billion bushels could be harmed and become an issue if it takes much longer to harvest. The USDA has lowered its yield forecast for this year’s crop but it was not a significant decline. If there is a surprise in the January final crop numbers, you would imagine it would friendly with a bigger drop in the yield or harvested acreage. Demand also has been so sluggish but at these price levels you have started to see some export figures pick up which could start to help corn forge a bottom. A trade deal in the coming months would also help corn futures as a rising tide lifts all boats mechanism. These are just a couple of examples of things to watch in the near future that could ignite corn futures after slumping for the past month and a half.
Possible Bullish Factors
- Lower final yield or harvested acreage
- Record large livestock numbers
- Adverse weather in South America
- A China trade deal that might see them buying corn and not soybeans
- A poor weather condition in the US during the next Spring/Summer
This strategy is recommended for livestock producers to protect against a possible rise in prices over the next year.
- Buy December 2020 400 call, sell the December 2020 470 call, and sell the December 2020 370 put for 2 cents. ($100 per) The margin is $450 to hold this strategy.
To create a marketing plan with Dennis Smith and Pat Garrity, call 844-472-4601 and ask for Dennis and Pat.
The information conveyed by ADMIS or its affiliates to the audience is intended to be instructional and is not intended to direct marketing, hedging or pricing strategy or to guaranty or predict future events, including the pricing and pricing movements of commodities and commodity futures contracts.