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Getting closer

to the points where I'd concluded charts said C and S could go without really changing much- qpprox 4.40/10.60 spot.


If we get closer I've decided to put on an option fence. Will probably go fairly wide- a buck or so spread in S, maybe .60 in C. Maqybe more. Caution, there is margin exposure with this.


A lot of stuff is feeling surprisingly spunky, though, not just grains. Anybody's guess but my take is that the whole complex and theme got thoroughly wrung out and this is the dead cat bounce as left over shorts get run over by some new longs.


Wouldn't be shocked to see it go higher on the back of that even with out a lot of verifiable new bull feed. That's why I'm using a fence.  The reason why I'm using a pretty wide fence is I want a combined delta of less than 1 so if it does I can capture a bit more.


Wasn't too long ago that a $4/10+ net hedge looked pretty nifty.


As per always, there are some conspiracy theories going around:


A more verifiable explanation would be that China created a $T in new credit last month (they pulled the world out of the collapse with $3-4T total after 2008 and extended the commodity boom for another 3 years). The problem is that they seem to be already dangerously overextended. If this is the case it is tricky- we could get a mini-boom and a collapse, which would be extremely difficult to market successfully.


Good to put this on the page to sort out my thoughts. If you thought either of the two theories had decent possibility of being accurate you'd probably just suck it up and buy the puts. Which does look a bit better when we're substantially higher.


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9 Replies
Honored Advisor

Re: Getting closer


If one really is so convinced one way or the other why not put on the big boy pants and do real hedges?

Get on the board with contracts and capture the whole gain? Options don't capture the whole move.

Kind of like basis here in the hinterland. Millions to be made , just have to step up to the plate.
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Re: Getting closer

BTW, it seems to me that Crude remains the keystone commodity and it does act like it wants to go to $50.


In simplest terms, crude has a strong seasonal tendency to put in highs around memorial day as the crack changes over to gas and inventory build for driving season starts to peak.


IEA projects that the world market will be near balance in the second half as US production continues to fall and world demand catches up. I'm far from certain of that but we'll see- for now it may be a good enough story to keep some hope under the market.


PS. My guess is that $50 restarts some fracking. Previous breakevens were maybe $60-80 but that includes a lot of sunk costs for lease acquisition and equipment. If you buy that stuff for 10 cents on the dollar, and wages are also substantially lower, you can probably make it work at $50 or less.


It's sort of like if corn went to $1 and the guy who worked in a factory and had some money in the bank could go buy a line of equipment for $30K and rent land for $40 an acre.

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Re: Getting closer

A decent point although I think I'd be a fool to think that I'm going to get anywhere close to hitting the bullseye blindfolded in a market like this.


The problem is how deep your pockets and credit line are.


My general rule of thumb is if the market exceeds the short call on the upside I take the loss and leave the put in place. Or even roll it up a cople strikes. There's a dinger on the books but if it wants to rally a few bucks I'm good with that.


If it is just a pump and dump then I've still got something on, at a worse point than desired but at a net point where some people were willing to make sales a couple weeks ago.


Best guess as to what happens here although all of these things won't come true in exactly this way- Arg dries out and begins to feed the world market for oil and meal. The US has a decent planting season with a few moments of concern and proceeds to a trend crop and the world also delivers near trend.


And, at some undetermined point- and this is the hard part- those facts become more certain and the funds find themselves crazily long and like Wile E. Coyote on the cliff.

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BA Deere
Honored Advisor

Re: Getting closer

Well, nothing is really "unexplainable" it`s just someone smarter knows something we don`t, if those running beans up $1.60 were idiots, they would`ve went broke long ago.  Like the saying about "if you can`t spot the mark in the poker game, then you`re it".   All of this commodities including precious metals climbing a day we are going to dope slap ourselves wondering how we didn`t see this massive amounts of national debt, state, municiple and private debt was one day going to have a day of reckoning.  I`m not putting dates on things and I`m not "mixing politics with economics" because it already has went on longer than I thought.   But one day, it will be 20/20 clear.

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Honored Advisor

Re: Getting closer

You give options a nice "feel"


It is IMO, the no mans land of marketing

Don't have the deep pockets or liquidity to hedge on the board..

So you pay 30 cents a bushel to someone who makes you feel like your hedging

Occasionally you get 20 cents back and feel like you did something

But mostly you feel snookered..........


Been that way most of my life 

Before that I was learning to spel

Re: Getting closer

I disagree wholeheartedly.


Take for example the period appox'98-'03 when the whole game was about selling anytime the market put its head above water and then maxxing the LDP in addition (assuming you actually wanted to meet or exceed COP).


It worked until it went horribly awry. In 2003 there were (I'm told), many, many farmers who sold 40 bpa at $6, grew 30 and had to pay $20-50 an acre to buy back what they didn't have. Which resulted in some grosses on bean acres of less than $150. Fortunately credit conditions had eased enough that there were fewer farm sales than you might have expected, but the holes still remained.


FWIW, you could have gone Wisner Style and bought an ATM put in May for each of those six years and still been ahead of that outcome by a large margin.


Here's are some things about options- cheap ones are usually worth what you're paying for them although they have their place if you need some sort of short term protection.


Generally I buy several expirations out and as close to the money as I can afford. There's nothing that says you have to keep them until expiration- for example as crop prospects improve you might convert them to cash sales or if it's a runaway you can still get something out of those and let' er run (and in that case be way ahead of forward contracting).


Was certainly way better than selling most of the time in the perky period of -06-13, probably even if every put you bought was a loser and assuming you made decent cash sales.


I 'spose that today, at least for a while longer, there are more farmers with a lot of on farm storage who can put most of it in their bins and wait it out. That's probably not even such a bad idea unless the market offers better forward prices. My sense of it is, though, that on the one to two year horizon the fundamentals are questionable enough that I ought to do some protection if a seasonal rally presents.


But I'll suggest that over time the on farm bin space will become more like it always has been for the best operators- essentially an on-farm elevator, a distinct business unit that serves a harvest/merchandising function solely independent of futures pricing.


While I'm pontificating let me add that, should we have a runaway the put buyer is in good condition to take advantage, and remember, those spikes are the one place where it has historically quite advantageous to be doing forward pricing into the next couple of years.


The rest of the time, not so much, on average.



Re: Getting closer

BA, you give "them" way too much credit.


"They" were very short corn at the bottom, probably will be very long at the top.

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Honored Advisor

Re: Getting closer

good explaination of your approach Nox.


Volatility helps that approach...

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Senior Contributor

Re: Getting closer

Looks like this thing is topping
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