Harvesting Profits From the Continued Decline in Corn and Soybeans

Published Tue, Oct 16th, 2012   Lee Lowell, Income Specialist

Earlier this year, the USDA estimated that this year’s crop of corn and soybeans would be the largest in history. It’s turned out to be anything but.

With the summer drought, the USDA scaled back their corn and soybean year-end supply estimates in the United States. The crop is now expected to be the lowest in roughly six years.

On such merits, it was no surprise to see corn and soybean prices hit all-time highs in August and September.

Corn prices topped out at $8.49 per bushel (based on the December 2012 futures contract). And soybeans topped out at $17.89 per bushel (based on the November 2012 futures contract).

Prices even beat the seasonality trend.

As I showed in a previous article, corn and soybeans tend to peak in price around June – and then decline until harvest time in October and November. But with the drought, grain prices have remained at higher levels much longer than usual, peaking this year in August and September instead.

Don’t expect prices to enjoy another rally, though.

Here’s why…

Corn and Soybean Bulls Are in for a Wake Up Call

The grain markets repeat their pattern almost to a T every year.

Speculators go into a frenzy during the summer and take on bullish bets, hoping for a once-in-a-lifetime rally (like the one we got this summer). It’s paid off handsomely. Since June, investors could have pocketed $17,500 with a single futures contract on corn, or $25,000 on soybeans.

The tides are turning, however. Although seasonality was a bit delayed this year, it’s finally kicking in. And now that the harvest has begun, the USDA has updated their monthly crop estimates.

Currently, the corn crop – at 10.7 million bushels – is just slightly lower than last month’s estimate. And soybeans were pegged at 2.86 million bushels, which is 9% above last month’s estimate.

So fears are subsiding that supplies won’t be adequate. And more supply leads to lower prices. I’m convinced we’ll see steady to lower prices from here on out.

Check out the chart below to get a clearer picture of each crop’s trajectory.

We should see more declines over the next couple months, too, considering that both harvests are well underway.

According to Bloomberg, “The corn harvest was 79% finished as of [Sunday], up from… an average of 38% for the previous five years… About 71% of the soybeans were collected, compared with… 58%, on average, from 2007 to 2011. “

Even after the downtick we’ve seen over the last month, though, there are still optimistic bulls out there who are paying high prices for call options contracts.

This gives option sellers the chance to profit by selling out-of-the-money (OTM) call option credit spreads.

I explained how to execute these trades back in July. And although corn continued to increase in value, the trades still worked in our favor – and continue to do so.

These trades offer limited risk, which can help you sleep better at night. And although they offer limited rewards, as well, the probability is very high that you’ll see those profits in the end.

Remember, as OTM option sellers, we’re not trying to figure out where the market will go. Instead we’re trying to figure out where the market won’t go. This increases your chances of success – as long as you have a decent grasp on a market’s technical and fundamental levels.

One trade you can look into is selling the March 2013 corn and soybean option contracts. Choose out-of-the-money strike prices (which are higher than the current price of the crop).

And as always, talk with your financial consultant if you think these positions might be right for you.

Ahead of the tape,

Lee Lowell