July 2010 all over again?

Recently the wheat market strength has had me thinking back to July of 2010.  A time when we saw wheat nearly double in a months time.

If memory serves me correct wheat and some of the other grains like corn made their low prices right before the June 30th report.  Then on the heals of a small Russia Crop, everyone bearish (very bearish) prices, and the funds massively short wheat we saw a rally in CBOT from a 4.25 low in late June to a high of 8.41 on August 6th.

The way that rally ended was most impressive and still stands in my memory.  CBOT wheat hit limit up on the 5th of August and then went nearly limit or limit up the next night only to close that session limit down when everything was said and done.

The best part of the wheat rally is what followed as it was really the start of the commodity rally in general.  The small Russia crop for wheat lead to less feed competition and helped out our corn exports and it also helped out our wheat exports.  When went from no profits in grains to good profits in a hurry.  It lead to many selling a little early as we had been down on prices since the 2008 collapse; but it really started and since lead to another leg up for the grain prices and commodity outlook.

Flash back to the here and now; we have some similarities now; funds are shorter today then they where back in 2010 which gives this rally a chance to be more then explosive and it is once again lead by weather and possible smaller crops.



Can this lead to another leg up for the grain prices?  After all since the 2010 rally wheat has been able to hold very close to the 5.50-6.00 level.  Can this wheat rally give us the support that allows 5.00 corn to now be the low for years to come?  Can it lead wheat back to the highs in 2010-2011?  Will we see butterfly effects that include new all time highs for corn and beans?

Maybe this rally in wheat is just to get things back in line; after all without it would we have had any wheat planted this fall?   Now perhaps getting wheat back in line helps keeping things in balance; helps us not see a huge swing in acres next year.

When it comes to marketing i am not going to get super bullish and not make sales.  But I am also going to remember 2010 and try to spread my risk out; scaling into sales slowly in hopes of a big bull market and I am going to remember prices just a few weeks ago for wheat.  With that in mind maybe I will look at buying some put protection and trying to create min price levels for my grain.

And that protection; i might want to get sooner then later as I don't know if this will be July 2010 all over again or just another correction in a bear market.

Opening Grain Market Comments 5-15-12

Markets are called better behind a better overnight session; while outside markets are mixed and could lead to a little pressure with ideas that the grains open a little softer then where the overnight left off at.

In the overnight session corn was up 5, beans where up 18 on old crop, new crop beans where up 15, KC wheat was up 8-9 cents, CBOT wheat was firmer by 8, and MPLS wheat was 6 higher.  At 8:50 outsides are mixed; EU wheat is up about 1 %, equities are near unchanged with the DOW up 5 points, crude is off about a dime, gold is off 8.00 an ounce, and the US dollar looks like it is making another move up with the cash index at 80.903.

Yesterday we had a crop progress report; that basically showed the majority of the row crops planted with good emergence and a good wheat crop.  We really lack weather premium right now as headlines lately have been great big crops coming.

Basis remains firm for corn and beans; perhaps firming a little bit.  Yesterday we saw open interest in soybeans go up which indicates good commercial interest and end user pricing; not bad thing to happen.

One thing that has been on the headlines lately is the issues in EU.  If it leads to more macro liquidation then the grains could struggle; if not it feels like basis and demand are strong enough that the grains have a chance to bounce from these areas.

I have heard talk of higher protein getting harvested down south.  I seen a train of 13.76 pro yesterday and heard most of 12.5.  Overall higher protein isn’t exactly the best thing.  It acts as a replacement for spring wheat if it is high enough and then it doesn’t get feed and doesn’t help our export program out.  So I think a higher pro crop down south hurts demand a little bit and I think demand is really what wheat needs if we want to have a bull story at some point down the road.  I would also have to think that a higher pro crop means yields are off a little from what was expected……typically pro and yields go hand in hand in a reverse relationship.

One thing we need to watch going forward is the inverse in the grains.  Most have a big inverse between old crop and new crop so if you are storing grain your cost is very high.  It is a good demand sign when things are worth more today then they are tomorrow so to speak but it is also a huge risk when marketing grain as a general rule you don’t want to sit on product threw an inverse.  Every day that goes by we get closer to new crop and the risk becoming greater as along as the inverse is out there.  Bottom line the markets are close to saying if you want to own the grain own it on paper as it doesn’t make sense to sit through the inverse.

Please give us a call if there is anything we can do for you.

Beans get smacked! - Neutral Nick update time

Beans got smacked today so it is time for Neutral Nick to look at his positions in an effort to try and manage his risk.

He went threw all of his positions and felt good about all of the months and all of the commodities other then July beans.

For corn he felt that his p & l graphs where at good support areas and didn't feel the need to chase in which might cause a lot of whipsaw action.

Same for wheat.

Before his soybean adjustments which I will display below he has overall profits in most of the trades he has on and his expiration profits giving him a much more potential.  Those charts have changed since his last update about a week ago.  You can find them at http://grainmarketingplans.blogspot.com/2012/05/neutral-nick-update-nearly-200k-booked.html

Soybeans today broke some major support and could very well see plenty of follow threw weakness; then again if you look at the report a couple days ago you might think beans have plenty more upside.

The corn and wheat markets are at the bottom end of the ranges they have been for some time; if we don't bounce Mr Neutral Nick might have to look to adjust sometime in the near future as he does have put options sold that are now close to or in some cases slightly in the money.  As mentioned before Neutral Nick this time around is using a little bias and his bias for those markets are A we are near a harvest low for wheat and we have year over year month over month decreasing supplies and B the cash corn market has shown no weakness leaving the cheapest spot to buy corn still the board for many so he isn't wanting to adjust at this time and C the new crop corn showing a yield of 166 is a little premature; Nick and myself are in the camp that we should see a weather scare at some point.

Here are Nick's updates and his corresponding bean graphs.

His only trades this week are the sale of 50 July 13.50 puts and 100 of the July 14.50 calls.  With us getting closer to the June expiration of these options this will probably be the last time he sells any July options.  He might buy some; but one thing he has to watch out for is Gamma Risk.

How do I decide what type of protection?

I was looking today at what gives me the best protection ahead of the USDA crop report.

To answer that question one has to ask more questions; such as how long do I want protection; what type of protection do I need if we move X cents or X dollars up or down......how much do I want to spend.

So after one answers those questions the next thing to do is the what if's; for me I use position book from RJO and run various what if's.

Today I ran the example of if I want to spend $50k in protection using Dec put options what gives me the best bang for my buck.  Do i buy out of the money options?  In the money?  Deep out of the money?  Etc

So I decided to run threw some what if's using Dec corn futures and various strikes.  I believe that I want to have the trigger pulled by July 4th ish; on the cash side; so i ran what if's or theoretically values based on July 6th.

I took 50k and bought as many put options as I could using the following strikes.

5.20 or ATM puts which i figured at 41-42 cents i could buy about 24 of them
5.00 or OTM put which i figured at 31-32 cents i could buy about 32 of them
4.50 or Deep OTM puts which i figured i could buy 77 of them
4.00 or Very Deep OTM (OTM out of the money) which i figured i could buy about 286 of them.

I didn't take into account the more commissions with the more quantity; but here is what i found that gains or losses to be (theoretically based on no volatility changes) at these various futures levels on the Dec Futures

6.00 Dec Futures - all four of the trades are big losers; with the ATM losing the least at 38k loss; followed by the 5.00 puts which lose about 41k, then the 4.50 puts which loss 45k, and lastly the 4.00 puts have lost about all value down about 48k.  Now if we are a producer this is the best option if you don't have 100 % protection because it means we have rallied 80 cents and should have more then paid for the 50k paid in protection


5.00 Dec Futures...give the Higher the strike the more profit. The 5.20 would be up aprox 2500, the 5.00 strikes about 1200, the 4.50 would be losing about 4500 and the 4.00 strikes would have lost you about 14k



4.50 Dec Futures....Here is where you see them all start to make money; this time however the more puts you have the more they make; so the best performance at 4.50 on July 6th ish would be the 4.00 puts which should be up about 75k, followed by the 4.50 puts which should be up about 60k, then followed by the 5.00 up about 48k, and lastly the at the money 5.20 puts are now up only 42k



4.00 Dec Futures....this levels and below is where you really see how well leverage can work for one.....the pattern is the same you are better off having bought more out of the money puts then you are at the money puts even though we are not yet in the money on the 4.00 puts they lead by far; you would now have turned your 50k investment into about 306k profit, your 4.50 would be 176k, your 5.00 would be 111k, and your 5.20 puts would be up about 94k profit



3.50 Dec Futures.....This is where you hit the home run so to speak; turning your 4.00 puts that are worth less then 4 cents when you buy them into about 55 cents each; having bought 286 of them you are now up nearly 750,000 in profits, the others also do good; but not even close versus having the many more 4.00 puts; the 4.50 puts would have about 335k in profit; the 5.00 puts would be up about 111k, and the 5.20 puts up about 94k

Bottom line when deciding what type of coverage you are looking for don't forget to look at the what if's; also keep in mind that the what if's i am looking at are based on 60 days from now; not expiration; as at expiration 4.00 dec futures don't make you any money at 4.00 puts; but in the shorter term they could make you a lot of money

Overall it seems to make sense to buy more OTM if you plan on only holding a short term; they don't perform as well in a sideways market nor an up market; but they are in another league as for performance in a down market

Please give me a call if you have questions

and as always make sure you understand that futures and options are very risky

Here is a screen shot of the what if's that i used in the above example

Neutral Nick Update - Nearly 200k booked profits

It's been a while since we heard from our mock trading character Neutral Nick.  That is both good and bad; good in that he hasn't been over trading and bad that he hasn't done a good job following up and monitoring his positions as much as he should be.

He recently had his May options expire; in which he left most expire worthless; both the ones he owned and had sold.  But he did have some soybean options that left him long; he chose to get out of them on the close on Friday.

Net with all of his May options expiring and his now turned futures positions Nick booked $193,437.50 profit before his costs and commissions.

Under normal full service brokers he would have paid about 10,800 in commissions; discounted online brokers could have been much less.

For his new trades or updates he has plenty of them with it being some time since he has followed up.

For corn his updates are buying back all of his cheap call options sold for nice profits and selling other options to pay for them as well as some more deferred options that fit his market ideas so he did the following basis Friday's close

Bought 70 CN 700 calls
Bought 120 CN 750 calls
Sold 50 CN 600 puts
Sold 50 CU 600 calls
Sold 50 CZ 600 calls

For soybeans he sold 100 of each of the following

July 1500 calls, 1450 puts
Nov 1600 calls, 1200 puts

For wheat he bought back 40 of the July 8.00 calls that he had sold and then sold 50 of each of the following

Sept 7.00 calls
Sept 6.00 puts
Dec 6.00 puts
Dec 7.50 calls

Overall the one thing you notice is he tried to take away some gamma risk and tried to sell more deferred options; his preference is out of the money with about 5 months left.  He also bought back and placed trades that follow his bias


Below are his P L Graphs; this doesn't include the nearly 200k winner he booked above; also keep in mind that he has risk between commodities and between different months.

Following that are each commodity broke down per contract month as he is looking to book consistent winners every time an option expires via continuing to sell time and volatility and that is what the above trades are trying to accomplish.


Keep in mind that he does have plenty of risk in in strategy

Neutral Nick Update 3-11-12

Neutral Nick updated today; first time in nearly a month.

I hope to post more screen shots of his present positions later in the week; one thing he is trying to do is not trade as much as last year and watch his gamma exposure a little closer. He also isn't getting caught up in selling just one certain month of options.  I.E. last year he was mainly selling July options and didn't sell any later then that; towards the end of his run his gamma exposure was just too much; that is part of the reason you see him in options that are near term all the way to some that are out in Dec.

MWC Marketing Hour Round Table

I put up an interesting trade this week in our weekly mock trading session.

It was a hedge trade......well kind of

the trade was buying 2 May 6.00 Corn puts and sell 1 8.00 Dec wheat call

below is some of the thinking i had on in the agweb.com marketing old and new crop discussion thread


http://discussions.agweb.com/showthread.php?14346-Marketing-Old-Crop-and-New-Crop-2012&p=225650#post225650

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one strategy that we looked at in our marketing meetings this week was selling dec wheat calls to buy may and july corn puts

based on theory that dec-dec corn-wheat spread has corn well under valued versus wheat.....so selling a call in wheat instead of corn in hopes that if it turns into a HTA corn has gained some of the 1.20 or so discount that it presently is

i think the level we used was buying 2 6.00 may corn puts and selling 1 dec 8.00 wheat call for a small credit

the reason we used may instead of july or dec is protection cost of only 14-15 cents or so; plus if market breaks i don;t think new crop breaks nearlly as hard; i think breaks or rallies will be lead by old crop corn.........so if i want to protect a price break i want to protect the area that has the most risk......in this case old crop corn

it is much more risky and tricky to manage then using the same month and same commodity but it does have some reasoning behind it

any thoughts on the trade

selling 1 dec 8.00 to 8.50 cbot wheat call to buy 2 6.00 ish may corn puts......as protection against corn.....and a sale on top side for corn

Neutral Nick Update

Well it's been a couple week's since Neutral Nick jumped back on the scene; so it is about time for an update.

Below you will see some screen shots showing Nick's updates and projections; keep in mind this time nick is much more diversified into the months he has options sold and purchased.  Generally he has purchased a few nearby options and sold deferred options. He also has used his idea's on where spreads go to decide how to position himself.  His goal is no longer to stay 100,000 delta short.  His system this time is trying to make about a million dollars in each of the grains; without huge margin exposure; watching his gamma risk and not building such a huge and unrealistic mountain if you will.

Check out his info below.

The above graph on his delta position is really one thing that needs to be managed.  A couple of reasons.  A) so he doesn't swing too direction bias and stays "neutral" so to speak  B) So he can help control his margin cost.  What is his plan to do that; take a little off the top side via near term closer to the money options that have a big gamma advantage over other options he has sold or is selling.

Mock Trading Update

last week we did add a few trades during our Mock Trading session;

I adjusted my long 6.00 march puts via selling a 6.40 march corn put

I also adjusted my short July put via the sale of a 7.00 July corn call

Other new trades that where placed include Kevin with a long soybean contract versus 2 short wheat contracts

Scott went short some CBOT wheat at 674 with a stop of 6.85 and an objective of 6.50

Duane went long 2 March Wheat with a stop at 6.55 while going short 3 March corn

Please stop in Onida this Wed if you would like to join in on the fun; as it is great for learning.

Neutral Nick is back

Neutral Nick our mock trading character is back; this time with a little different rules and different game plan.  Not just focused on his delta position; nor does he no longer have an unlimited checkbook.  Plus he is planing on rolling things out this time; so no real end date.

Here are his trades to start off; many off of July futures; but some off of the Dec futures too.

Farm Direction Forward - Opening Grain Market Comments soft outside markets

Below are opening comments as well as a forward from Kevin Van Trump who will be one of the speakers for next week’s grain marketing workshop that we are sponsoring in Pierre on Feb 2^nd at the Ramkota at 10:00 a.m.; Ed Usset will be the other presenter.  Please give us a call or shoot us an email to RSVP for what should be a great time.

Markets are called mixed to supportive this a.m. behind a firmer overnight session; outside markets are a little weak and most calls are slightly below where we left off the overnight session at.

In the overnight session we saw corn up 3 on the old crop while new crop was off 2, beans unchanged to down a couple,  MPLS wheat was 4 higher, KC wheat was up 3, and CBOT wheat was up 5.  At 9:00 outside markets have crude down a little over a dollar a barrel, equities are weaker with the DOW down 82 points, and the US dollar is firmer up 379 on the cash index at 80.247.

Not much for new news out this a.m.  The rumors

Neutral Nick Consolidated Positions - Projected Profit and Loss

utrBelow I have some consolidated charts for Nick's projected P L on his very MOCK farm.

But first I recently read Ed Usset's blog enteries on spreads between commodities.  I would reccomend checking it out as many believe spreads show a good deal of what is behind actual demand in a given market.  Spreads are one of the strategies that DTN uses in their 6 Factors Marketing Strategies.

To check out Ed's blog go to http://edsworld.wordpress.com/

Keep in mind that spreads at times can be lagging indicators as we typically see front months lead on rallies with defered months lagging; and vice versa when we see the markets under pressure (at least in my opinion).

Back to Neutral Nick; I have had many ask on what his overall outlook is looking like.  You will find the spots on this blog with each and everyone of his trades as well as all of his booked gains/losses on closed positions, but here is what it looks like for all of his open corn, soybean, and wheat positions combinded.  As mentioned earlier I will work towards an actual hard bottom line number that includes some allowance for slippage and commissions once Nick's old crop story grain marketing is done.

That does remind me; perhaps Nick should be looking at new crop grain marketing sometime soon?

Click here to see Nick's margin info http://grainmarketingplans.blogspot.com/2011/05/nicks-margin-requirements-wow-good-bad.html