Author: Aaron Smith

Several articles have discussed the benefits of on-farm storage for southern producers (Maples, 2022 and Duncan and Smith, 2022). However, there are marketing strategies that producers can investigate if they do not have on-farm storage. These include delayed pricing contracts, commercial storage, and using futures or options to establish a re-ownership position for the commodity sold.  

Delayed pricing contracts allow ownership of the grain to be transferred to a local elevator, barge point, or other purchaser without establishing the price. Delayed pricing contracts allow the producer to fix the price after delivery at a future point in time. As with any legal contract, attention to detail is important to fully understand the differences in terms and conditions offered. Additionally, counterparty risk should be investigated. Counterparty risk is the probability that the other party in a transaction may not fulfill its part of the deal and may default on the contractual obligations.

Commercial storage is another option that can be investigated. Commercial storage requires the producer to pay a monthly storage fee, while maintaining ownership of the grain. Storage fees are highly variable, based on facilities provided and local availability. Not all producers will have access to commercial storage in their location. Similar to delayed pricing contracts, terms, conditions and counterparty risks for commercial storage agreements should be fully understood. 

Futures and options can be used to establish a re-ownership position after the sale of the crop. Producers can buy a futures contract or a call option for a deferred contract month and experience financial gains if the futures contract price appreciates after the cash crop is sold. For example, buying a March corn contract at $6.90 can provide a financial gain if the March futures contract, between purchase date and expiration, increases (buying low and selling high). This is a speculative position and can result in losses if the contract price declines. This strategy also requires a margin account to cover any losses incurred by the futures position.

Buying a call option allows a producer the opportunity to profit if prices go higher with a limit on losses if prices decline. The cost of this opportunity is the upfront premium paid. For example, on September 7, 2022, a $6.80 March corn call could be purchased for 47 cents, thus the March futures contract would need to trade above $7.27 before a financial benefit is received by the purchaser. Premiums can be high, so producers may want to offset the premium cost. Selling a call option can reduce the upside potential but save the producer premium costs. Figure 1 shows a simple strategy of selling a $7.50 March corn call for $0.29 and buying a $6.80 call option for $0.47. The net result is a maximum loss of $0.18 and a maximum gain of $0.52. The return to the producer will be contingent on the price of the March corn contract and when options are exercised. The risk and reward should be fully understood before a producer enters any futures or options position. 

Figure 1. March corn option example: buying an at-the-money call option and selling an out-of-the money call option

References and Resources:

Barchart.com. Corn Options Prices. Accessed at: https://www.barchart.com/futures/quotes/ZCH23/options?moneyness=20

Biram, Hunter, and S. Aaron Smith. “The Option to Augment the Crop Insurance Price Floor.” Southern Ag Today 2(35.1). August 22, 2022. https://southernagtoday.org/2022/08/the-option-to-augment-the-crop-insurance-price-floor/

Duncan, Hence, and S. Aaron Smith. “Estimating the Cost of a Grain Bagging System“. Southern Ag Today 2(31.3). July 27, 2022. https://southernagtoday.org/2022/07/estimating-the-cost-of-a-grain-bagging-system/

Maples, William E. “On-Farm Grain Storage in Southern States“. Southern Ag Today 2(38.1). September 12, 2022. https://southernagtoday.org/2022/09/on-farm-grain-storage-in-southern-states/

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Smith, S. Aaron. “Marketing Strategies if Producers Do Not Have Access to On-Farm Storage.” Southern Ag Today 2(40.1). September 26, 2022. Permalink

The change in the November soybean futures price from the market open on July 1 to market close on August 1 was down $0.56/bu. However, the open-to-close change does not capture the volatility that occurred in July 2022. The trading range for the month (contract high-low) was $2.01/bu, with 11 out of 21 trading days having moves of greater than (+/-) 25 cents (Table 1). Volatility reflects uncertainty regarding drought/production, geopolitics, trade, the global economy, and many other factors. Futures markets reflect the opinion of market participants on factors affecting current and future supply, demand, and prices. Market participants, including producers, merchandisers, end users, and speculators, will weigh factors differently; however, at any point in time, the futures market can be deemed as the best guess of future value as indicated by trades for various contract months.  The constant flow of new information causes markets to move continuously. 

As mentioned above, numerous factors have attributed to the dramatic price swings in soybean markets. However, one factor that will be watched closely moving forward is the change in the CME crush margin and the allocation of soybean value embedded in soybean meal and soybean oil. Crush margins can provide producers with valuable information regarding the drivers of demand for soybeans and soybean futures market prices. The CME crush margin is defined as:

CME Crush Margin = [(Price of Soybean Meal ($/short ton) x 0.022) + (Price of Soybean Oil (¢/lb) x 11)] – Price of Soybeans ($/bu)

In 2022, the value of the September soybean CME crush margin had ranged from $1.38/bu to $2.26/bu, with an average of $1.80/bu. The CME crush margin on August 1 was $2.18/bu, near the top of the 2022 range indicating a rebound in the June low and a strong incentive for more crush (Figure 1). When the CME crush margin peaked on April 27, the percent of value embedded in a bushel of soybeans was 52% meal and 49% oil. In other words, oil was leading the charge for soybean value (the value of a bushel of soybeans attributed to oil and meal has ranged from 60:40 to 50:50 in 2022). Now, as of August 1, that ratio has moved to 58:42 indicating meal is providing a greater influence on soybean value. 

Both soybean oil and meal have provided strong influence in soybean markets this year and demand for both products remains strong. Strong demand and shrinking USDA 2022/23 U.S. ending stock numbers (230 million bushels in the July WASDE) will continue to support soybean prices. Bearish influences, economic growth and geopolitical tensions, primarily with China, are still present in the market, but demand continues to be a positive factor supporting soybean prices.

Table 1. November Soybean Futures Price July 1 – August 1, 2022

Figure 1. Percent of Soybean Value Attributed to Meal and Oil Compared to CME Cush Margin (September Contracts)

References and Resources

Barchart.com. Accessed at: https://www.barchart.com/futures/grains?viewName=mainCME Group. Soybean Crush Reference Guide: https://www.cmegroup.com/education/files/soybean-crush-reference-guide.pdf

Smith, S. Aaron. “July Volatility in November Soybean Futures Prices“. Southern Ag Today 2(33.1). August 8, 2022. Permalink

On June 30, USDA released the June Acreage and Grain Stocks reports. The Acreage report is a survey-based estimate of planted acres for primary crops. The producer survey is conducted the first two weeks of June. The Grain Stocks report provides survey-based estimates for corn, soybean, wheat, and sorghum stocks, which includes producers and commercial grain storage facilities. Survey respondents indicate stocks held on their operation as of June 1.

Comparing estimated June 2022 to 2021 final planted acreage estimates: corn was down 3.4 million acres, soybeans up 1.1 million acres, wheat up 0.4 million acres, cotton up 1.2 million acres, sorghum down 1 million acres, rice down 0.19 million acres, and peanuts down 42 thousand acres (Figure 1). Combined, planted acreage for the seven crops is projected to be 1.91 million acres lower than in 2021. 

Compared to USDA’s March 2022 Prospective Plantings report, the June Acreage Report indicated an increase of 431,000 acres of corn, soybean acres decreased 2.63 million acres, wheat decreased 259,000 acres, cotton increased 264,000 acres, sorghum increased 100,000 acres, rice decreased 109,000 acres, and peanuts decreased 28,000 acres – a combined decrease of 2.2 million acres. The majority of the reduced acres planted were for soybeans in North Dakota (1.1 million) and Minnesota (500,000). However, future USDA acreage adjustments remain likely due to delayed planting, primarily in the Northwest Corn Belt States.

The June Grain Stocks report indicated, year-over-year, corn stocks were up 5.7% and implied disbursement from March 1 to June 1 was down 4.9%; soybean stocks were up 26.3% and implied disbursement from March 1 to June 1 was up 21.1%; wheat stocks were down 21.9% and implied disbursement from March 1 to June 1 was down 21.8%; and sorghum stocks were up 195.7% and implied disbursement from March 1 to June 1 was down 10.2%.

What are the market implications for producers moving forward?

Markets were declining prior to the release of the USDA reports (Table 2). Recent market declines can be attributed to global economic concerns, improved weather forecasts, higher global production estimates, and a reduction in long speculative positions in futures markets. The reports provided a mix of bearish and bullish estimates. 

Looking forward, there remains a great deal of uncertainty with the 2022 crop. However, it is likely that the preharvest highs for corn, soybeans, cotton, and wheat have already been set. As such, producers should evaluate the amount of 2022 production that is unpriced (or does not have downside price protection), storage availability, and investment in the crop. Margins have tightened dramatically and may be negative for many producers, if below trendline yields are realized. Crop insurance will provide some protection and will be an important risk management and marketing consideration moving forward. The harvest price for wheat (Chicago) was set at $10.11 compared to a current (July 5) futures price of $7.93. The projected price for corn ($5.90), cotton ($1.03), and soybeans ($14.33) are all higher than the current harvest contract prices – $5.78, $0.93, and $13.16, respectively. The price collapse of the past two weeks has created a new marketing and risk management environment for producers. Now is the time for producers to evaluate where they stand with their current risk management and marketing plans and make adjustments to establish a path forward.

Figure 1. USDA NASS Planted Acreage Estimates, March, June, and Final for Corn, Soybean, Wheat, Cotton, Sorghum, Rice, Peanuts, and Combined, 2018-2022 (million acres)

Table 1. USDA Estimated Corn, Soybean, Wheat, and Sorghum Stocks, March 2021 to June 2022  

Table 2. Corn, Soybean, Wheat, and Cotton Harvest Futures Contract Prices for Select Dates

References:

Barchart.com. Corn, soybean, cotton, and wheat futures prices. Accessed at: https://www.barchart.com/futures/grains?viewName=main

U.S. Department of Agriculture – National Agricultural Statistics Service (USDA-NASS). June 30 Acreage Report. Available on-line at: https://usda.library.cornell.edu/concern/publications/j098zb09z.

U.S. Department of Agriculture – National Agricultural Statistics Service. June 30 Grain Stocks Report (USDA-NASS). Available on-line at: https://usda.library.cornell.edu/concern/publications/xg94hp534.

U.S. Department of Agriculture – Risk Management Agency (USDA-RMA). Price Discovery. Available on-line at: https://prodwebnlb.rma.usda.gov/apps/PriceDiscovery/.

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Smith, Aaron, and William E. Maples. “The USDA June Acreage and Grain Stocks Report.”Southern Ag Today 2(30.1). July 18, 2022. Permalink

Since the projected crop insurance price was established at the end of February, a substantial price gap ($1.51 ¾ per bushel as of May 18^th) has opened between the current December futures contract price and the projected crop insurance price (Figure 1). The futures rally has been fueled by numerous factors – Ukraine-Russia, drought concerns in the U.S., lower planted acreage in the U.S., high input prices, strong global demand, and reduced global stocks. The strong upward trend in price has made producers hesitant to make sales or hedge price risk. Many producers have been reluctant to cash forward contract a large portion of their 2022 corn due to fears of missing out on higher prices and production concerns in drought affected regions in the South. Additionally, producers that traditionally use futures to hedge price risk are concerned with the potential for large margin calls if prices continue to appreciate.

Figure 1. December Corn Futures Contract Daily Close and the Projected Crop Insurance Price, January 3, 2022, to May 18, 2022. 

A marketing tool worth considering is options. Options strategies can be made as complex or simple as the market participant desires. This article illustrates two examples. Alternative #1 is more complex, and Alternative #2 more basic.  For the two strategies, the goal is to manage downside price risk on 15,000 bushels (three 5,000-bushel contracts) while allowing upside mobility in the futures price. We do not include basis in the analysis and all prices and premiums are as of May 18 for the December 2022 corn futures contract.  Results shown are at option expiration when time value in the premium goes to zero.  

The two alternatives examined are:

Alternative #1:

Sell one $7.50 put option for a premium of $0.75;

Sell one $7.50 call option for a premium of $0.75; and

Buy three $7.10 put options for $0.50. 

The strategy results in a net zero premium to the producer (excluding transaction costs). Alternative #1 is subject to maintaining margin in a futures and options trading account.

Alternative #2: 

Buy three $7.10 put options for $0.50.

The strategy costs the producer $0.50 per bushel up front (plus transaction costs), but no margin account is required.

Figure 2 depicts the outcome for both alternatives if December corn futures trade between $4.00 and $10.00. If the red dotted line (Alternative #2) is above the black line (Alternative #1), then Alternative #2 has a preferable outcome to Alternative #1, and vice versa. Based on the analysis there are two key December corn futures prices when the preference between the two alternatives switch – $6.00 and $9.00. Simply stated, if the December corn futures contract price is between $6.00 and $9.00, Alternative #1 yields a greater outcome than Alternative #2.  

Figure 2. Outcomes for two options strategies at December corn futures contract prices between $4.00 and $10.00.

Both strategies can help manage price risk for corn producers. Alternative #2 sets a futures price floor at $6.60 ($0.70 above the projected crop insurance price) and allows the producer to participate if the December futures contract continues to strengthen. Additionally, the put options could be resold, and a portion of the time value recovered, prior to expiration if December corn futures prices remain high. Alternative #1 provides greater outcomes when the December corn futures contract is between $6.00 and $9.00; however, it does not set a futures price floor and comes with margin requirements. 

The two alternatives described above are examples of how options can be utilized to reduce price risk in futures markets. For those producers new to trading futures and options, it is strongly recommended to work with a qualified broker or professional when examining potential strategies and outcomes. 

Disclaimer: Comments are for educational purposes and are not meant as specific trading recommendations. The buying and selling of corn options involve risks and are not suitable for everyone. Working with a qualified broker or grain merchandiser is strongly suggested.

References and Resources:

USDA – Risk Management Agency. Price Discovery Tool. Accessed at: https://prodwebnlb.rma.usda.gov/apps/PriceDiscovery/GetPrices/YourPrice

Barchart.com. Corn soybean and wheat historical futures prices. Accessed at: https://www.barchart.com/futures/grains?viewName=main

Smith, Aaron. “Managing the Price Risk Gap between December Corn Futures and Projected Crop Insurance Prices“. Southern Ag Today 2(23.1). May 30, 2022. Permalink

Table 1. Projected Planted Area (‘000 of Acres) 

	2020	2021	2022
Soybeans	83,354	87,195	90,955
Corn	90,652	93,357	89,490
Other	67,261	65,243	65,095
Wheat (all)	44,450	46,703	47,351
Cotton (all)	12,092	11,220	12,234
Sorghum	5,880	7,305	6,205
Rice (all)	3,036	2,532	2,452
Peanuts	1,663	1,585	1,571
Total	310,407	317,161	317,375

Data Source: USDA, Prospective Planting Report

On Thursday March 31, USDA released the Prospective Plantings report. Nationally, principal crop acres planted were projected at 317.375 million, up 214,000 acres compared to last year. Corn acres were projected at 89.490 million, down 3.867 million compared to last year. Soybean acres were projected at 90.955 million acres, up 3.76 million acres compared to last year. Cotton acres were projected up 1.015 million acres at 12.234 million acres. All wheat acres were projected at 47.351 million acres, up 648,000 compared to last year. Compared to projections released in February at the USDA Outlook Forum, March projections were for 2.51 million fewer acres of corn, 466,000 fewer acres of cotton, 2.955 million more acres of soybeans, and 649,000 fewer acres of wheat. 

The change in projected acres planted from February to March estimates were not surprising considering price trends in February and concerns over high fertilizer prices. On December 1^st, the 2022 harvest soybean-to-corn futures price ratio was 2.21 — a price that would historically favor planting corn over soybeans. By February 15^th, the ratio had moved to 2.45 – a price ratio that would normally be neutral to favoring soybeans. From a cost of production standpoint, higher fertilizer prices create an input cost disadvantage for planting corn, , thus a ratio of 2.45 would definitely favor planting soybeans.  

Markets reacted to the Prospective Plantings report mostly as expected with harvest contracts for corn up 27 ¾ cents, soybeans down 49 ¾ cents, cotton down 1.16 cents, and Chicago wheat down 21 cents. Moving forward, many producers likely have a good idea regarding what they are going to plant.  Weather is the wild card that could shift acres. However, the price ratio moved in favor of corn after the Prospective Plantings report was released.  The soybean-to-corn harvest futures price ratio on April 5^th was 2.06 — strongly favoring corn. Will we see an increase in corn acres planted? The next USDA acreage estimate will be the June 30 Acreage report.

References and Resources:

USDA – National Agricultural Statistics Service (NASS). Prospective Plantings report. Accessed at: https://usda.library.cornell.edu/concern/publications/x633f100h

USDA – Office of the Chief Economist. Agricultural Outlook Forum. Accessed at: https://www.usda.gov/oce/ag-outlook-forum/2022-commodity-outlooks

Barchart.com. Accessed at: https://www.barchart.com/futures/grains?viewName=main

Smith, Aaron. “Less Corn, More Soybeans, Cotton, and Wheat Projected to be Planted in 2022″. Southern Ag Today 2(16.1). April 11, 2022. Premalink