Commentary
The market will get a look at the USDA Monthly WASDE report tomorrow at 11 am Central. Last month, the USDA projected corn yield at 179.5 BPA. Many analysts including prominent crop scouts and some brokerages have yield coming in between 175.5 and 177. Why might they be reducing yield In their outlooks? Well the simplest answer maybe disappointing good to excellent conditions in the Dakotas, parts of Iowa and Minnesota. The counter argument here is that yields East of the Mississippi have been excellent. Illinois, Indiana, Michigan, Wisconsin and Ohio to name a few have potential bin busters. Could we posit that the USDA could keep yield near 179 citing better yields in the East will more than make up for any potential short crops in the West? I have seen the USDA offer such explanations in past years. It doesn’t mean that they will this year but there is precedent for them to not make any major adjustment for yield. I am going to offer 2 suggestions here . One for speculation and one suggested for hedge using options.
Trade Ideas
Futures-N/A
Options:
Conservative speculative option strategy:
Sell the October 21 Corn 450/500 call spread at 46 cents OB.
Aggressive hedge
Buy the Dec corn 5.00 puts. Sell the Dec corn 650 calls. Bid zero on the spread, meaning you bought the put and sold the calls for the same price. Trade costs and fees is the cost to entry.
Risk/Reward
Futures-N/A
Options- Conservative Speculative-Collect 46 cents or 2300 upon entry minus trade costs and fees. Max risk is 50 cents plus trade costs and fees. Because one is collecting 46 upon entry, the max loss is 4 cents or $200.00 plus trade costs and fees.
We would need December futures to close below 4.50 at October option expiration (9/24/21) to keep the 46 cents. However if and when we break towards the 5.00 level, we maybe able to buy back the spread for 10 to 15 cents lower from where we are selling.
Aggressive Hedge-This strategy is aggressive in my view as you are short calls. However for a corn producer it makes sense to have something on in the form of long puts/short calls on a percentage hedge in Dec 21 corn provided one owns the corn.
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