Thursday, May 3, 2012

Trade Strategy ahead of USDA Report - Allendale Estimates on Balance Sheet

Below is a press release with Allendale’s estimates for the next USDA report.

Things could get very ugly if we see a carryout number close to where Allendale has it pegged at

Don’t be afraid to get some protection ahead of the report that is out May 10th

My thoughts are that we should see 5.00 area on the board hold as support until the point that the market feels like the corn is actually going to be there; if Allendale is right and we see a 2 billion bushel carryout or higher many have targets for corn starting with a 3 on the board; one that we regularly follow has a 3.50 target………… mentioned I am not that bearish and I think we have a long way before knowing that the crop is made but still the risk is out there and we need to keep in mind that USDA is king as to moving the prices; so it is very possible that we see bearish numbers that leave many unsold and un protected

For those that are undersold for new crop and wouldn’t be against selling some at 6.00 on the dec board here is a trade that would protect should things fall out of bed between now and July 4th;

It is a trade that I wouldn’t hold after July 4th because of how time value tends to work and depreciate against one

The trade is selling a 6.00 Dec call; which now becomes the max you get for your corn;

Then selling a 5.00 put and using finance of the short call and short 5.00 put to buy a multiple of 4.00 Dec corn puts (aprox 14)

Here is the trade on a graph; it shows that a steady market to slightly up market the trade doesn’t cost you anything by July 4th; at expiration the max you can get for your corn is 6.00; but likely one pulls off this trade right after or before July 4th and replaces with a sale or opens the top side back up

If we lose a dollar between now and July 4th ish the trade should net you over 5,900 or about 1.18 a bushel in protection.

The key with buying multiple puts is not to get stuck in the range where one sold the 1 put and the area where you bought multiple so this trade is designed to exit either right before the June 30th report or shortly after because the risk in between the strike levels used

The short call should be treated like always when selling covered options; some of you that might mean just making a sale when option expires; others might want to buy back if you can at 25% or less of what you sold for; some might risk it to double what you sell it for.  (keep in mind that the short call gives you margin requirements and possible margin calls and carries unlimited risk)

Here is the mentioned graph

The redline shows the expected what if 64 days from now or July 6th; the green line is at expiration which I wouldn’t recommend at all for this strategy ;  it is a plan to prevent against a train wreck where we see acres go up or carryout numbers huge like the Allendale press release below

This first screen shot shows 5.80 down to 2.80 red line is July 6th

This next screen shot is for July 6th; but it shows the market if we go up or stay the same; where the strategy would cost you about 1400; but in a sideways to slightly up market one might hold this trade longer with proper risk management as net cost is 0 at expiration if Dec corn stays between 5.00-6.00 on the futures; presently at 5.30

It also shows the unlimited risk in an up market; but if this is a hedge the cash should be sold and that should off set the hedge loss

To recap

The thoughts are to place above trade; exiting around July 4th in a down hard market; and holding re-evaluating the trade in a sideways to slightly higher market (probably lifting the short put at that time)

Bottom line is with the risk out there some sort of marketing plan is advised that helps one lock in profits while keeping a little upside open; the above is just one thought out of thousands of possibilities; if you want to discuss any please give me a call.  Some might want to just look at doing something simple like buying the cheap out of the money puts for comfort.

As always keep in mind that futures and options are risky and not suitable for everyone.

Jeremey Frost
Grain Merchandiser
Midwest Cooperatives
605-295-3100 (cell)
605-258-2166 (fax)

This communication may contain privileged and/or confidential information and is intended only for the use of the individual or entity to which it is addressed.  If the reader of this message is not the intended recipient, you are hereby notified that any unauthorized dissemination, distribution, and/or use of this communication is strictly prohibited.   This communication makes no representation or warranty regarding the correctness of any information contained herein, or the appropriateness of any transaction for any person.  Nothing herein shall be construed as a recommendation to buy or sell any commodity contract.  There is a risk of loss when trading commodity futures or options.

From: Allendale, Inc. []
Sent: Thursday, May 03, 2012 7:45 AM
To: CO-Pierre, Jeremey Frost
Subject: May 2012 Supply & Demand Estimates

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For Immediate Release
Rich Nelson
Allendale, Inc.

Allendale's WASDE Estimates
May 2012

Corn - USDA yield will be 166.2 due to early plantings. Their production will be 14.645 billion and stocks of 2.072. Allendale assumes 161.36 trend yield adjusted to 163.78 due to early plantings. Our production estimate is 14.432 billion and stocks of 1.934. Argentina production is 20.5 mt (USDA 21.5). Brazil production is 62 mt (USDA 62).

Soybeans - Estimates are made using 43.96 for trend yield. New crop US exports are a record 1.525 billion bushels.
Argentina production is 43.0 mt (USDA 45.0). Brazil production is 66 mt (USDA 66).
2012/13 stocks are calculated assuming massive 50 mt and 78.5 spring 2013 crops for ARG and BZL.

Wheat - A record yield of 46.40 is expected. This surpasses 2010's 46.35. A record winter wheat yield of 48.5 is used. The previous winter wheat record was 1999's 47.7. USDA will use trend yields for other spring and durum.

     Supply & Demand, to be RELEASED 7:30 AM CST ON 05/10/12

PRODUCTION           11/12      12/13       Trade  Average     Actual    
In million bushels   USDA      Allendale    Range Estimate   05/10/12
Corn                 12358       14645
Soybeans              3056        3207
All Wheat             1999        2271
Other Spring           455         481
Durum                   50          83
Winter                1494        1707
 HRW                   780        1060
 SRW                   458         428
 WW                    256         219

US ENDING STOCKS           USDA       ALDL       USDA     ALDL
in million bushels         11/12     11/12       12/13     12/13
US Corn                     801        772                  2072
US Beans                    250        210                   132
US Wheat                    793        775                   916

in million metric tonnes   11/12     11/12      12/13     12/13
World Corn                122.71    121.30               162.20
World Soybeans             55.52     54.10                60.20
World Wheat               206.27    205.92               206.21  

Commodity trading is risky. Allendale, Inc. assumes no liability for the use of any information contained herein. Past financial results are not necessarily indicative of future performance. Information contained herein was obtained from sources believed to be reliable, but is not guaranteed as to its accuracy. Any examples given are strictly hypothetical and no representation is being made that any person will or is likely to achieve profits or losses similar to those examples.
Allendale, Inc

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