Gulke: Profit Enhancement Ideas

Gulke: Profit Enhancement Ideas

Price action the past couple weeks held out hope, but there were stipulations needed to post a change in trend written about in this column. Previous months’ highs (July 3) needed to be exceeded on a closing basis; that’s important. Also stipulated on the downside, a pre-harvest low is predicated on the weekly up-gaps posted early last September in corn followed by soybeans holding August 2024 lows which began the rallies into Feb. 21, 2025. So far, neither have been validated, but the downside support seems tentative thanks to predictions of record yields.

Achieving the July 3 objective seems like a figment of our imagination as it is about 40 cents away from the current cash market in corn. The release of corn yield estimates of 188 bushels per acre (bpa) and 186 bpa by StoneX and S&P Global, respectively, cloud the issue of a major rally happening without significant evidence on the demand side. Otherwise, ending stocks balloon for corn and that puts price appreciation in jeopardy for 2026-27 as well. July futures are trading 18 cents premium to March and December 2026 is another 7 cents premium to July. This puts the premium at 45 cents from one crop to another.

The responsibility is on USDA to view optimistically the demand for 2025-26 to mitigate the burden of the respective ending stocks over 2 billion bushels (bb). This means we start the next marketing year 2026-27 with over 600 million bushels (mb) more than this year. Current marketing year price is 45 cents less than what is being offered for 2026 crop year.

We know that all things are not likely to be equal and a lot can happen to change things, including weather and the economic and political atmosphere. Without outside influence affecting supply, the global demand needs to increase sufficiently to offset a 600 mb surplus in the U.S. as well as increasing supply out of South America from year to year. If the Ukrainian war sees a respite, that likely adds more supply to an oversupply situation. This leaves increasing domestic use to rescue oversupply. South America seems to be doing just that, but the U.S. seems slow in reacting, let alone becoming proactive. In the meantime, price battles further headwinds of expectations from USDA’s August WASDE.

If the corn market, for example, is going to be worth 45 cents more in 12 months, and soybeans hold their head above the $10.50-$11.00 mark, and upfront demand earns the implied carry, time is running out for evidence. The August WASDE needs to increase demand accordingly, as we can ill afford to see supply go up and demand stagnate entering a record harvest. If not, price will seek a level that discourages production and that isn’t good.

Using the tools of futures and options to maintain flexibility and offer profit enhancement can lessen decreasing profitability. Flexibility is obvious, but profit enhancement is often ignored. A July $4.50 call option has a premium of about 23 cents, implying someone will pay for the right to own my corn at $4.50 bushel or 93 cents bushel more than current demand-month September futures.

This is the opposite of what your local broker may have you do at harvest for corn that needs to move off the combine. He’d rather have you replace sold production with a long call to re-own just in case prices rally. So would your commercial elevator, as he wants the physical inventory. Selling call options on a growing crop or inventory already in a bin is similar to equity (stock market) traders who sell an out-of-the-money call option on a stock they own (inventory). If price goes up, the value of the sold call goes up, creating a loss; but inventory held goes up in value as well. If the stock goes down, he keeps the premium sold. Currently, a $4.50 July call has a delta of .45 (45%) — meaning it will lose money about half as fast as the underlying futures will gain. If futures rally in what otherwise seems to be a bear market to the extent the move violates your price outlook, it should be an indicator that something has changed and that strategy may have to be readjusted.

Those that don’t understand the advantages of selling calls versus paying to own them are either uneducated, don’t think out of the box, don’t have the time or won’t spend the time to develop a rational market outlook. Managing an enterprise to be profitable means understanding it is more important to be a CFO (chief financial officer) than a plant manager. That does not mean there isn’t risk involved to be managed, just like there is risk in growing the crop in the first place. But doing nothing after watching prices make new yearly lows isn’t acceptable either.

We have come full circle from a year ago when prices reversed and headed higher for six months. This year is not last year, and should USDA agree with record yields without corresponding increases in demand, the market will do what is needed to be done and that is to financially pressure the government to act eventually. The market seeking price levels to buy demand is not something pleasant financially. Let’s hope USDA sees the benefits of tariff implications and doesn’t underestimate demand like it did last year, keeping prices under pressure longer than necessary.

Obviously more explanation is needed, but if profit enhancement opportunities are of interest, talk to your broker or contact me for more information.

Jerry Gulke can be reached at (707) 365-0601 or by email at Jerry@gulkegroup.com