Surprise Yields puts Corn Market in Play for Option Sellers
Bearish USDA Crop Report Leaves Bearish Fundamental Set Up
Still Opportunities for Call Sellers
For those investors keeping their powder dry for an option selling set up in the grain markets, now might be the time to start breaking it out of the keg. It’s late summer, and the 2015 US corn crop is in the home stretch. The crop has passed the critical pollination phase and harvest is fast approaching. The trade spent the better part of this month trying to weigh what effect the summer weather would have on yields. Will it hurt the crop a little or a lot?
As it turned out, it didn’t hurt it at all. As a matter of fact, the early wetness in the growing season actually helped the development of the 2015 crop as we found out in yesterday’s USDA monthly supply demand report.
If you read our special feature on soybeans in this month’s OptionSeller newsletter, you already know the weather situation in the Midwest has been pushing bean prices around for the better part of the summer. Concerns about weather being “too wet” turned out to be, as we projected, overstated. Turns out rain does indeed make grain.
What we didn’t know is how much it helped. Yesterday’s USDA supply demand report showed the USDA actually increased 2015 yield projections for soybeans to 46.9 bushel per acre (from 46.0 in July) and increased US ending stocks to 470 million bushels (from 425 in July). This when many in the trade were expecting cuts to both yields and stocks. This was considered bearish for soybean prices.
Corn is grown in many of the same areas as soybeans, and thus, can often track bean prices during this time of year. But corn is a different animal nonetheless and can provide a fertile market for option sellers on its own.
Despite yesterday’s sell off, we think opportunities to sell corn calls are still present into harvest.
Summer Weather Brings out the Specs
Nothing brings grain speculators out of the woodwork faster than summer weather stories. Earlier this summer, corn prices rallied on concerns that growing conditions were too wet. As weather stabilized, prices subsided. The approach of the August USDA Supply Demand report, coupled with drier weather in early August, brought out the specs again. Traders were positioning ahead of the report in hopes that the USDA would substantially decrease yields for this year’s crop. Others bought out of concerns that weather conditions were now becoming “too dry.”
This type of trading (guessing at the outcome of a report) of course, is gambling. As option sellers, we don’t gamble. We analyze all of the data and make a logical conclusion – NOT of where prices are likely to go, but only where prices are most unlikely to go. We prefer to take a few dollars off of the table on each roll, rather than go for the jackpot each time with a high chance of losing.
But with the report (released August 12) now out of the way, the outlook is more clear for an option seller.
USDA Yield Reduction
In the August 12 Supply Demand report for Corn, The USDA increased 2015 US corn yields by 2.0 bushels per acre from 166.8 (in the July report) to 168.8. This resulted in increase in 2015/16 ending stocks. Ending stocks are now projected to come in at 1.713 million bushels as opposed to 1.599 million bushels in the July report. (For a discussion of the importance of ending stocks to grain prices, see our Video on Ag Fundamentals from August 6, 2015 on the blog).
With this month’s yield increase, 2015/16 US Corn Ending Stocks will be the second highest in a decade.
Both yields and ending stocks figures were well outside the range of expectations are considered bearish for the corn market.
How Does this fit into the Big Picture for Corn Prices?
While the trade is focused on the US crop right now, Corn is a global crop and price will ultimately take its direction from the global supply stage. For instance, should US corn become too expensive, a major buyer like China could simply buy lower priced corn from Argentina. This reduces demand for US corn and brings prices back into line.
Global Supply, however, appears even more burdensome.
Global Ending Stocks for Corn are the 2nd largest in nearly three decades.
Global Ending stocks at 195.09 million metric tons will be the 2nd largest in the last 28 years. Global stocks to usage will be 2nd highest since the turn of the century (when corn usage surged as a result of ethanol demand for gasoline).
What Does this Mean for Option Sellers?
The anticipation of the report coupled with drier weather concerns for August brought higher prices and new volatility to the corn market. With the report out of the way, the uncertainty (and now prices) have subsided. August weather was dry but not hot, and had an optimal effect on the well moisturized soil in most growing areas.
We almost always like selling grain calls into harvest and this year is no different, despite this week’s price slide.
US weather stories have distracted the market away from the bearish global supply picture. We feel the burdensome US crop figures, the advent of US harvest and the new supply it brings to global markets will keep corn prices under bearish pressure well into autumn. In addition, China’s devaluation of the yuan this week makes US corn more expensive to Chinese buyers – an outside bearish influence (and unwelcome rib kick to corn bulls already on the ground.)
Thus, our view is that a least likely scenario would be a rapid and severe acceleration of corn prices into the US harvest.
That is the set up call sellers typically seek out. December 2015 Corn The 4.30 strike price is close to 2015 price highs – and would seem out of reach given this week’s supply numbers.
December 2015 Corn
The 4.30 strike price is close to 2015 price highs – and would seem out of reach given this week’s supply numbers.
If you are looking to take premium, we suggest considering the December 4.30 calls at 8 cents ($400) or better on a bounce back rally this week. The market closed off the lows on Wednesday but we feel the chart damage is done and fundamental values will gravitate steady to lower. If 4.30 strikes do not hit premium targets, investors should still be safe with the 4.20 strike.
We’ll be working closely with our managed clients this month to get the best premiums into harvest.
If you are a high net worth investor…
Interested in targeting diversified income and/or growth by selling options in corn and other commodities, a privately managed account with OptionSellers.com could be the solution for you. There are still some prospective client consultations remaining for the month of August. Call Rosemary Veasey at 800-346-1949 to check on availability. (Initial consultations are held via phone).
James Cordier is the author of McGraw-Hills The Complete Guide to Option Selling, 1st, 2nd and 3rd Editions. He is also founder and president of OptionSellers.com, an investment firm specializing in writing commodities options for high net-worth investors. James’ market comments are published by several international financial publications and news services including The Wall Street Journal, Reuters World News, Forbes, Bloomberg Television, Fox News and CNBC. Mr. Cordier’s book, The Complete Guide to Option Selling 3rd Edition (McGraw-Hill 2014) is available at bookstores and online retailers now.
*Price Chart Courtesy of CQG, Inc.
Fundamental Charts courtesy of The Hightower Report
Seasonal Chart courtesy of Moore Research, Inc
***The information in this article has been carefully compiled from sources believed to be reliable, but it’s accuracy is not guaranteed. Use it at your own risk. There is risk of loss in all trading. Past performance is not necessarily indicative of future results. Traders should read The Option Disclosure Statement before trading options and should understand the risks in option trading, including the fact that any time an option is sold, there is an unlimited risk of loss, and when an option is purchased, the entire premium is at risk. In addition, any time an option is purchased or sold, transaction costs including brokerage and exchange fees are at risk. No representation is made that any account is likely to achieve profits or losses similar to those shown, or in any amount. An account may experience different results depending on factors such as timing of trades and account size. Before trading, one should be aware that with the potential for profits, there is also potential for losses, which may be very large. All opinions expressed are current opinions and are subject to change without notice.