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Todd's Take
Monday, July 22, 2019 12:25PM CDT
By Todd Hultman
DTN Lead Analyst

There are certain things you try to teach your kids not to do: don't run with scissors in your hand, don't take candy from strangers, don't pet animals you don't know -- and don't buy corn calls in the summer.

Okay, maybe only my son heard that last one, but if you spent time around this dad, you would know that normally, I find buying call options in the summer to be a horrible idea. First of all, in the case of corn or soybeans, buying calls in July goes against the long-term seasonal tendency of prices to fall as they get closer to harvest. Second, the best time to buy either call or put options is earlier in the year before price volatility expands option premiums in the summer.

Third, you better have a good reason for buying any option because the success rate of most people predicting the future direction of grain prices is lousy.

So why on July 18, am I sitting here pondering the idea of buying a December 2019 $5.00 corn call? The exercise is not for myself -- I'm contractually barred from trading in the futures or options markets; DTN wants our readers to know that I am not touting my market positions. In that regard, I am bias-free.

I am thinking about corn calls these days on behalf of two groups of corn growers. The first group are the readers of DTN Market Strategies that followed my recommendations and forward sold 50% of their anticipated corn production for 2019.

The second group are producers out there that might have not done any hedging yet for the 2019 crop. I understand all too well when prices go up, it can be difficult to pull the trigger on a sale, knowing that prices might go even higher. Nobody wants to miss out on the next big rally, if there is one. Unfortunately, that next big rally often has a way of not showing up.

Even with all my prejudices against buying a call, there are some unusual things about 2019 that make the conversation more interesting. As I've often explained since June 28, the market does not yet have a credible planting estimate.

The more factual side of USDA's Acreage report told us that 77.0 million acres of corn were planted at the time of the survey and 15.8 million acres were not yet planted. USDA's second planting survey should tell us how many of the 15.8 million unplanted acres got planted, but not until the next World Agricultural Supply and Demand Estimates (WASDE) report on Aug. 12.

The other half of the crop equation is yield, and USDA will not have a yield estimate based on field surveys until Sept. 12. Put it all together and the market is going to transition from not having much useful information to having a more accurate assessment relatively quickly. The potential for surprise is real and in this environment, prices could move quickly in either direction.

To be up front, I am not particularly bullish on cash corn prices that have already been flirting with their highest level in five years, especially in mid-July. As an analyst, however, I have to admit in this scenario that you don't have to move the needle very far on either the acreage estimate or the yield estimate to take 1 billion bushels (bb) off of the current ending stocks estimate of 2.34 bb. A modest surprise here or there could have large price consequences over the next two months.

Seeing that December corn has fallen from $4.59 1/4 last Friday to just under $4.30 on Thursday's close, I look at the option board to find the December 2019 $5.00 corn call closed at 10 3/4 cents a bushel and the $6.00 call at 3 cents.

Frankly, the thought of paying roughly 11 cents or more for the $5.00 call just to have some upward participation in this uncertain market is not an attractive bet, and that's what happens when you try to buy options in the summer, the premiums are inflated.

Having thought through the situation, I decided not to recommend the calls to Strategy customers. For corn growers that haven't forward sold any 2019 production yet, I can't help but think you are passing up some good opportunities.

You don't need to buy a cheap corn call to make a forward sale, but if it helps you pull the trigger, you might want to consider it. These opportunities for high prices don't last forever.

Todd Hultman can be reached at Todd.Hultman@dtn.com

Follow him on Twitter @ToddHultman

(BE/BAS)


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