Category: Crop Marketing

For corn and soybean producers, activity in futures markets in February is very important. For many producers, projected crop insurance prices and volatility factors are determined from February 1-28. The projected price will set revenue guarantees and potentially affect planting decisions. At the start of February 2023, December 2023 corn futures ($5.94) were slightly above last year’s projected crop insurance price of $5.90 per bushel and November 2023 soybean futures ($13.65) were well below last year’s futures price of $14.40. The direction of prices from now until the end of February will be key for producers when examining risk management and marketing strategies for the 2023 crop.

Every year, during winter producer meetings, when discussions turn to risk management and marketing strategies, someone inevitably states that December corn and November soybean futures tend to fall during the projected crop insurance price determination period (February 1-February 28, in Tennessee and numerous other Mid-South states). This statement usually coincides with the assertion that external forces (government and/or global grain companies) are moving markets to reduce premium expense or foster utilization of other price risk management tools to boost profits. 

Does a simple analysis support this? No. From 2010 to 2022, the data does not back this claim (Figures 1 and 2). Instead, the data shows prices follow the month-over-month price trend. For example, December corn average monthly prices from December to April declined in 2010, 2013, 2015, 2019, and 2020. For 2011, 2014, 2018, 2021, and 2022, December corn futures prices increased. The remaining years 2012, 2016, and 2017, showed no trend and moved mostly sideways over the five-month interval. For the November soybean contract, average monthly prices from December to April declined in 2013, 2015, 2017, 2019, and 2020. For 2011, 2012, 2014, 2016, 2018, 2021, and 2022, November futures contract price increased. The remaining year, 2010, had no trend and moved mostly sideways over the five-month interval.

What does this mean for the 2023 crop insurance price determination period? Not much. This is a backward-looking metric; the trend is not revealed until the trend has occurred. However, a small month-over-month average decline occurred between December and January for both corn and soybean harvest futures. The final projected crop insurance prices for corn and soybeans will be important to producer marketing and risk management decisions moving forward.

Figure 1. Monthly average December corn futures prices from December to April, 2010-2023

Figure 2. Monthly average November soybean futures prices from December to April, 2010-2023

References

Barchart.com. December Corn and November Soybean Historical Daily Closing Prices. Accessed at: https://www.barchart.com/futures/quotes/ZCZ23/historical-download and https://www.barchart.com/futures/quotes/ZSX23/historical-download

USDA – Risk Management Agency (RMA). Price Discovery. https://prodwebnlb.rma.usda.gov/apps/pricediscovery

Author: S. Aaron Smith

Associate Professor, Crop Marketing Specialist

University of Tennessee

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Smith, S. Aaron. “Do Corn and Soybean Harvest Futures Rise or Fall During the February Projected Crop Insurance Price Determination Period?” Southern Ag Today 3(6.1). February 6, 2023. Permalink

A common approach adopted by analysts and researchers is to investigate the relationship between the marketing year average price and the stocks-to-use ratio.  The stocks-to-use ratio (S/U) is often cited as an easy representation of the relationship between supply and demand.  When the S/U ratios are low, the supply of the commodity is low relative to the demand.  This is typically an indicator of high prices.  When the S/U ratios are high, the supply of the commodity is high relative to the demand.  Prices in these cases would be expected to be much lower.

The marketing year average price, as determined by the National Agricultural Statistics Service (NASS), is the weighted average of monthly prices of commodities surveyed during the marketing year, whereas the S/U ratio is computed as the ratio of ending stocks to total demand during the marketing year. The marketing year varies for different commodities. Corn and soybeans have marketing years from September 1 to August 31.  Peanuts has a marketing year of August 1 to July 31. 

We look at the relationship between S/U ratios and prices for corn and soybeans in figures 1 and 2.  During the period of 2003-2021, we clearly observe the expected downward sloping relationship for corn and soybeans.  As the supply increases, relative to the demand, the price of the commodity is lower.  Figure 3 shows the relationship between S/U ratios and the price of peanuts, or more precisely the lack of any relationship between these two indicators.  In other words, there is no relationship between current peanut prices and current measures of supply and demand.

The negative relationship in the corn and soybean market can be attributed to the size of the crop, significant number of spot market transactions and the existence of a futures market, with the latter two contributing to price discovery in the market.  However, the similarity between corn and soybeans and that of peanuts is that all are grown in the south – yet that is where it ends. The peanut crop is small relative to these larger commodities, with sales largely done through contracts between the growers and a concentrated sheller market. The absence of a futures market is also a factor that limits price discovery and transparency which could account for the lack of responsiveness in prices to current market conditions. So, while S/U ratios are helpful in explaining prices of many commodities, the same is not true for the peanut sector.

Figure 1. Corn Marketing Year Average Price and Stocks-to-Use Ratios from 2003-2021

Figure 2. Soybean Marketing Year Average Price and Stocks-to-Use Ratios from 2003-2021

Figure 3. Peanut Marketing Year Average Price and Stocks-to-Use Ratios from 2003-2021

Attah, Festus, and Adam Rabinowitz. “Traditional Stocks-to-Use Ratios are of Little Value in Determining Peanut Prices.” Southern Ag Today 3(5.1). January 30, 2023. Permalink

The 2021 and 2022 corn and soybean harvest futures prices for November and December had increased trading ranges (Figures 1 and 2). November 2022 soybean futures, from November 1, 2021, to contract expiration, had a trading range of $3.81 ($12.02 to $15.81; Figure 1). December 2022 corn futures, from December 1, 2021, to contract expiration, had a trading range of $2.23 ($5.43 to $7.66; Figure 2). Tight U.S. stocks, the Russia-Ukraine conflict, global inflation, supply chain disruptions, and drought in the U.S. and South America have propelled prices higher but have also increased volatility. In 2021 and 2022, the November soybean contract had 45 and 74 trading days, respectively, with a 20-cent up or down move. For the previous five years, the November soybean contract had a total of 64 days with a 20-cent up or down move. Similarly, the 2021 and 2022 December contracts had 49 and 65 trading days, respectively, with moves of 10 cents up or down. The previous five years had a total of 54 trading days with a 10-cent move.

Figure 1. November Soybean Futures Contract Price from November 1 to Expiration, 2010-2023*

What will 2023 bring for soybean and corn futures prices and how should this affect producers marketing and risk management decisions? As of January 19, the 2023 average daily closing futures prices for corn and soybean harvest contracts were near the top of the 2010-2022 price range – November soybeans averaged $13.89 and December corn averaged $5.98. As such, it would be reasonable to think that prices have more downside risk than upside potential, but this will be largely determined by weather. Additionally, there remains a tremendous amount of uncertainty in the global economy, geopolitics, and U.S. and global production for the 2023 crop year. It is likely that volatility will continue in corn and soybean futures markets. 

What should producers do? Protecting against downside risk seems logical given current market conditions. This can be accomplished using numerous marketing tools (futures, contracts, options, etc.). Put options provide an opportunity to establish a futures price floor. There are several strategies that producers can consider – at-the-money put options, out-of-the money put options, or a combination of put and call options to reduce premium expense. Each producer will have different risk tolerances, so there is no one size fits all approach. The key is to evaluate strategies and choose the one that makes the most sense for your individual circumstances. A simple example of an out-of-the money put option strategy (current December corn futures are trading at $6.00) is:

Buy a $5.50 December Put Option for 27 cents setting a $5.23 futures floor. This removes 87% ($5.23/$6.00) of the futures price risk, while leaving the upside open and the flexibility to set basis at a later date.

For producers interested in learning more about using futures and options to manage risk in grain and oilseed markets, the CME group has a self-study guide that explains several strategies.  The current uncertainty and volatility in corn and soybean futures markets necessitates downside price protection. Producers should evaluate strategies that can remove price risk for the 2023 crop. 

References

Barchart.com. December Corn and November Soybean Historical Daily Closing Prices. Accessed at: https://www.barchart.com/futures/quotes/ZCZ23/historical-download and https://www.barchart.com/futures/quotes/ZSX23/historical-download

CME Group. 2019. Self-Study Guide to Hedging with Grain and Oilseed Futures and Options Accessed at: https://www.cmegroup.com/trading/agricultural/files/pm255_self-study-guide_hedging_en_2019.pdf

Author: S. Aaron Smith

Associate Professor and Extension Economist

University of Tennessee Institute of Agriculture

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Smith, Aaron. “Trading Ranges and Volatility for November Soybean and December Corn Futures Prices.” Southern Ag Today 3(4.1). January 23, 2023. Permalink

Since the fall of 2020, grain prices have risen significantly (Figure 1). Production shortfalls in the U.S. (derecho windstorm in August 2020 and drought in 2022), drought in South America, increasing feed demand in China, followed by Russia’s invasion of Ukraine, pushed cash grain prices, in many cases, to near record highs. Late in 2022, cash prices were back down to pre-Russian invasion levels, but still historically high. 

Price forecasts for the 2023 crops will rightly focus much attention on planting intentions and yield prospects. High prices in the U.S. and globally provide market incentives for farmers to increase production.

But the other side of the supply and demand balance sheet deserves attention as well. Looking at the 2022/23 marketing year corn market in the U.S., feed and residual use and fuel use are the two largest use categories, 5.3 billion and 5.275 billion bushels, respectively. Next are exports at 2.075 billion bushels (Figure 2). Market conditions point to increased production in 2023, but what about use?

For the feed use category, data from USDA shows a decline in Grain Consuming Animal Units (poultry, pork, and cattle) over the last several years (USDA, ERS 2022). Gasoline demand, the foundation of ethanol use, is dampened by newer vehicles that use fuel more efficiently, or, in a growing segment of the automobile industry, do not use any gasoline at all (EIA, 2022). Export demand is impacted by the availability of exportable grain supplies from other major production areas, the value of the dollar, and global economic growth prospects. Grain use can go down when incomes and GDP slow down or decline. Global economic growth prospects will be slowed by the continued turmoil of the Russian invasion of Ukraine, broad inflation pressures, and lingering COVID pandemic effects (IMF, 2022). 

Early season grain budgets for 2023 show high prices and high input costs resulting in tight margins for farmers in many production areas. An increase in grain supplies in 2023 relative to use could result in lower prices that squeeze these margins even more as we head into summer and fall.   

Figure 1. Texas Cash Corn, Cash Sorghum, and Cash Wheat, Weekly, July 2020 to December 2022

Figure 2. U.S. Corn Use, 2005/06-2022/23

References

Energy Information Administration. “This Week in Petroleum”, available online at https://www.eia.gov/.

International Monetary Fund. “World Economic Outlook Report October 2022”, available online at https://www.imf.org/en/Home.

USDA, ERS. “Feed Grains Database”, available online at https://www.ers.usda.gov/data-products/feed-grains-database/.  

Author: Mark Welch

Professor and Extension Economist Grain Markets and Marketing, Risk Management, Production Economics

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Welch, Mark. “The Demand Side of the Supply and Demand Balance Sheet.” Southern Ag Today 3(3.1). January 16, 2023. Permalink

Peanut production in the U.S. can be described as having a symbiotic relationship with cotton production as the two crops are produced in rotation throughout the southeastern states.  This can create a competitive environment between these crops, with prices a key factor in determining the number of acres to plant in a given year.  Since the peanut quota system was eliminated with the Farm Security and Rural Investment Act of 2002, peanut prices have been determined through market transactions with the first buyers of farmer stock peanuts, in what can be described as a highly concentrated market.  Alternatively, there is more transparency and price data available for cotton with the existence of a futures market.

Figure 1 shows the relationship between peanut and cotton marketing year average (MYA) prices from 2003 to 2021. The unusually high peanut prices in 2011 and 2012 are from weather-related supply issues.  While there is not a strong trend in the data due to some of the notable outliers, a visual inspection of Figure 1 highlights the positive relationship between these two commodity prices.  For example, when cotton prices have been above 75 cents per pound, peanut prices have been above $450 per ton.  

Figure 1. Peanut and Cotton Price Relationship: 2003-2021 Marketing Year Averages

A recent Southern Ag Today article, Navigating the “Winter” in Cotton Farming in 2023, projects an optimistic 2023 futures price for cotton to be 80-85 cents per pound.  Current December 2023 cotton futures prices have been hovering around 80 cents per pound.  At this futures price for cotton, history would suggest a peanut price between $450 and $500 per ton.  

While this can give farmers a good first estimate of expected prices it must be acknowledged that there can be significant deviation from this range as other factors may affect the price of one commodity that do not move the other prices in the same fashion.  For example, within the range of $450 to $500 per ton for peanuts, the cotton price ranged from a low of $0.478/lb in 2008 to a high of $0.914/lb in 2021.eanut

Author: Adam Rabinowitz

Assistant Professor & Extension Specialist 

adam.rabinowitz@auburn.edu

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Rabinowitz, Adam. “The Peanut-Cotton Price Relationship.” Southern Ag Today 3(2.1). January 9, 2023. Permalink