Category: Crop Marketing

In 2022, soybean planted acreage is estimated to increase 9% in the southern United States (U.S.) with a total planted acreage of 14.76 million acres. Southern states are estimated to account for about 16% of the total soybean acreage planted in the U.S. in 2022. Table 1 shows the past five-year history of soybean acreage by state. In 2022, Arkansas is expected to lead leads the southern states at 3.25 million acres, followed by Mississippi at 2.35 million acres. All southern states, except for Oklahoma and South Carolina, are expected to increase acreage in 2022, when compared to 2021.  Soybean acreage in the south has substantially rebounded since 2019, when acreage was reduced due to low prices influenced by the US-China trade war. Soybean acreage across the south in 2022 is up 26 percent compared to 2019.

The observed increase in soybean acreage is influenced by a positive price outlook. On May 12^th, USDA released their monthly World Agricultural Supply and Demand Estimate (WASDE) report. The May WASDE provided the first USDA projections for the 2022/23 marketing year for soybeans (and other crops). In this report, USDA projects the national average farm price for soybeans in 2022/23 to be $14.40/bushel. If realized, this price would match the record high achieved in 2012. The positive price outlook is supported by higher exports and domestic crushing on the demand side, compared to 2021. The supply side calls for higher production due to increased acreage, which increases estimated ending stocks to 310 million bushels. However, with a stocks-to-use ratio of 6.76 percent, the overall market environment is supportive of higher soybean prices. 

Even with the positive price outlook, it’s important for producers to have a marketing plan in place to take advantage of the current high prices in the market. The new crop soybean Nov’22 futures has been trending higher since January 12^th, with a closing price of $15.12/bushel as of May 25^th. While prices are currently high, we continue to see considerable price volatility and producers should familiarize themselves with available tools to mitigate price risk. Available tools for price risk mitigation include forward cash sells on portions of expected production or hedging using the futures market. Another tool to consider is forward pricing with options which was covered in a recent Southern Ag Today article by Dr. John Robinson with an application to cotton markets (Forward Pricing with Options on ICE Cotton Futures – Southern Ag Today).

State	2018	2019	2020	2021	2022*
Alabama	345	265	280	310	350
Arkansas	3,270	2,650	2,820	3,040	3,250
Georgia	145	100	100	140	170
Kentucky	1,950	1,700	1,850	1,850	2,000
Louisiana	1,340	890	1,050	1,080	1,200
Mississippi	2,230	1,660	2,090	2,220	2,350
North Carolina	1,650	1,540	1,600	1,650	1,800
Oklahoma	640	465	560	580	560
South Carolina	390	335	310	395	390
Tennessee	1,700	1,400	1,650	1,550	1,850
Texas	175	80	120	110	160
Virginia	600	570	570	600	680
Total	14,435	11,655	13,000	13,525	14,760

Maples, William E. . “Soybean Acreage Higher in Southern States with Increased Price Outlook“. Southern Ag Today 2(24.1). June 6, 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

A producer’s marketing plan is a contingency plan to sell a commodity in the context of price risk. Cotton prices have been in a long term up-trend, with considerable volatility in recent weeks (see the blue line in Figure 1). A typical marketing goal would be to sell commodities at relatively higher prices, or (conversely) protect un-sold commodities from down-side price risk.  

One way to reduce the risk of lower prices is to forward cash contract portions of expected production.  However, drought-elevated production risk in 2022, coupled with uncertain plantings, uncertain yield impacts from reduced fertilizer usage due to higher fertilizer prices, inverted futures markets, likely price volatility, and higher costs of financing have all likely led cotton merchants to limit their forward cash contract offerings.

Futures hedging by selling ICE cotton futures contracts is another approach to set a price floor, subject to basis risk. However, the possibility of higher trending futures has raised the actual and potential margin risk of futures hedging.  In addition, futures hedging sacrifices any benefit of potentially selling at higher cash prices if the market continues to rise.

Put options are one way to lock-in high price levels without margin calls or sacrificing upside flexibility. A put option gives the buyer the right, but not the obligation, to sell cotton futures at a certain price. In Figure 1 below, Dec’22 cotton futures (the blue line) have trended higher since 2021. As of May 3, the Dec’22 futures settled at 126.18 cents per pound. While this has happened, the premium for put options on Dec’22, like the $1.20 put option graphed in red, have gotten cheaper over the long term. The $1.20 put option means that the buyer of this put option has the right to sell Dec’22 cotton futures at $1.20 per pound.  Note that hedgers have flexibility in the price coverage level by being free to choose from different strike prices.

Put options at a given strike price cost less in a rising market because the put option gives the right to have sold Dec’22 futures at $1.20, which has intrinsic value only when the underlying futures price is below $1.20.  Therefore, put option premiums move opposite to the direction of the underlying futures price.  This is important because an increasing put option premium can act as an insurance payment against falling futures and falling cash prices (assuming a stable cash basis).  The insurance analogy is important since nobody knows the direction of futures prices for certain.  And unlike other forms of insurance, put options can be offset when they are no longer needed, e.g., when the crop is sold in the cash market, giving hedgers a chance to recover  some of their initial expense in option premiums.

At 9.71 cents per pound (as of May 3), buying a $1.20 put option on Dec’22 ICE futures is essentially buying the right to a 110.29 cent short futures ($1.20-$0.0971) position, without the margin call exposure and without removing upside potential if markets continue to strengthen.   Waiting to implement this strategy could be beneficial, i.e., more affordable, if ICE cotton futures continue to rise, which they might.  So hedging portions of expected production with put options over the next several months might be a good way to dollar-cost-average decent hedged prices.

Figure 1. Dec’22 ICE Cotton Futures Settlement Price (in Blue) vs. Associated 120 cent Put Option Premium (in Red).

Daily

July 28, 2021 – May 3, 2022

Robinson, John. “Forward Pricing with Options on ICE Cotton Futures“. Southern Ag Today 2(22.1). May 23, 2022. Permalink

The war between Russia and Ukraine has upended grain flows from the Black Sea region for months. Since the first days of fighting in late February, Ukraine’s export terminals in the southern part of the country have been closed. This from a nation that provides 10 percent of the world’s wheat exports and 12 percent of global corn exports.  

As fighting continues, the threat to grain supplies extends beyond the export of old crop grain (2021/2022 marketing year) to the production of the 2022 crop.  Russia, with its military control of the region, may still be able to provide wheat to its trading partners. The world wheat trade has other participants that may be able to increase their sales.  

The impact of the conflict on the feed grain market may be harder to compensate for. Ukraine is the fourth largest corn exporter, 23 mmt in 2021/2022, 12 percent of the world total, and there are not many other major export providers of feed grain. After Ukraine, the next largest corn exporter is the EU at 4.9 mmt or 2.5 percent of total exports.  Much uncertainty surrounds Ukrainian agriculture and market participation in the upcoming crop year in terms of productive capacity, foreign market access, and export controls due to domestic food security concerns. What will the implications be for 2022 world feed grain fundamentals—supply and demand—without the contribution of Ukrainian agriculture? 

In this article, feed grain statistics are those reported for world coarse grains by USDA (corn, sorghum, barley, oats, rye, millet, and mixed grains) as well as wheat for feed.  Since 1980, wheat for feed has constituted about 20 percent of total world domestic wheat use (Figure 1).  The contribution of wheat as a feed grain for this analysis will be 20 percent of total wheat production, use, and stocks.

Without Ukraine, feed grain supplies in the 2022/2023 marketing year would decrease by about 60 mmt: 53 mmt for coarse grains and 7 mmt of wheat (USDA, WASDE, 2022). A simple linear regression model of the response in consumption to a supply change in feed grains yields a regression coefficient of +0.34, in that a 60 mmt decrease in supply would have an estimated 20 mmt decrease in use (Figure 2). 

Using those estimates, without Ukraine, the feed grain days of use on hand at the end of the marketing year would fall to a 78-day supply in the 2022/2023 marketing year, down from an 85-day supply for 2021/2022.  This extends the downward trend of the last six years, a time frame in which the marketing year average price of corn, which accounts for over 70 percent of all feed grains, has increased from $3.36 per bushel to a current estimate of $5.80 per bushel. This would be the lowest days of use on hand number since 2013/2014 (Table 1 and Figure 3). The years of tightest stocks to use in feed grains (lowest days on hand) since 1980 was from 2003/2004 to 2012/2013.  

If, instead of a complete loss, the supply of feed grain in the upcoming marketing year from Ukraine were to decline by half, that would reduce world feed grain supplies by 30 mmt and use by about 10 mmt. The resulting days of use on hand at the end of the marketing year would be an 81.6-day supply.  The impact of the Russia/Ukraine conflict is having severe and significant impacts on the world grain trade. In the short term, this impact is creating the tightest supply situation for feed grains that we have seen in the last ten years.  The World Food Program’s emergency coordinator in Ukraine expects 20 percent of planted acres will not be harvested this July and that spring planted area will be down by about one third (Reuters, 4/21/2022).  Even if this conflict were to be resolved relatively soon, damaged infrastructure will limit commodity shipments for an extended period of time.  The longer drawn out the conflict, the greater the magnitude of fundamental adjustments that will be required 

Figure 1. World wheat feed use as a percentage of total domestic use, 1980/1981-2021/2022

Figure 2. Response in feed grain use to a change in feed grain production

Table 1. World feed grain production, use, stocks, days on hand, and the corn marketing average farm price

	Beginning stocks, mmt	Production, mmt	Use, mmt	Ending Stocks, mmt	Days on Hand	U.S. Corn MYA $/bu
2016/2017	399	1,566	1,526	438	105	3.36
2017/2018	438	1,514	1,524	428	103	3.36
2018/2019	428	1,545	1,561	406	95	3.61
2019/2020	406	1,570	1,572	396	92	3.56
2020/2021	396	1,592	1,610	379	86	4.53
2021/2022	379	1,657	1,655	386	85	5.80
2022/2023 est	386	1,597	1,634	349	78

Figure 3. World feed grain production, use, and days of use on hand at the end of the marketing year, 1980-2021, and 2022 estimate

Welch, J. Mark. “Outlook for Feed Grain Fundamentals in the 2022/2023 Marketing Year“. Southern Ag Today 2(21.1). May 16, 2022. Permalink

It is generally the case that the U.S. cotton market is influenced by aggregate production uncertainty.  One reason for this is that a majority of the U.S. acreage is planted in Texas (Figure 1), with much of that under dryland conditions contributing to historical abandonment rates between 4% and 62% statewide.  In drought years like the current one, this production risk is only heightened.  The management of this risk is potentially helped by publicly available market information data.

The first upcoming major information source is the May 12^th USDA “World Agricultural Supply and Demand Estimates” (WASDE) report published by the USDA’s World Agricultural Outlook Board (https://www.usda.gov/oce/commodity/wasde ).  The May report is notable for publishing USDA’s first official, comprehensive projections of U.S. and world crop supply and demand variables.  Historically, the May WASDE report tends to be closely watched and is frequently associated with cotton market volatility.

Like other crops, U.S. cotton is monitored by weekly crop condition reports and crop progress reports (on Mondays) from USDA’s National Agricultural Statistics Service (NASS, https://www.nass.usda.gov/).  Because cotton is a perennial bush in its native habitat, its growth and response to stress are different from annual grain crops.  Hence there is less correlation between weekly crop conditions and progress for cotton yield outcomes compared to grains.  Nevertheless, the news media and some market analysts pay attention to these weekly observations between the major report milestones.

June 30^th “Planted Acreage” is another closely watched major report that is conducted by USDA/NASS.  This report is sometimes associated with market volatility when it contradicts expectations based on the March 31^st “Prospective Plantings report from USDA.  USDA’s Farm Services Agency (FSA) provides supplemental acreage information with periodic certified acres data through the summer (https://www.fsa.usda.gov/news-room/efoia/electronic-reading-room/frequently-requested-information/crop-acreage-data/index ). 

For U.S. cotton, the September WASDE report represents the first extensive proven yield sampling for areas outside of South Texas, in addition to grower interviews.  This sample-based production estimate is refined in subsequent WASDE reports through December, as well as with data on cotton ginnings.  The uncertainty about cotton yield may be further exacerbated in 2022 from restricted input applications.  For example, anecdotal evidence of reduced quantities of nitrogen fertilizer applications (due to the higher cost) could contribute to lower-than-average yields.   The resulting yield effect from fewer inputs might not be realized until the ginnings data in November.  Hence, this season could involve extended price volatility beyond the normal resolution of weather market uncertainty.

Robinson, John. “Milestone Indicators of U.S. Cotton Supply and Demand“. Southern Ag Today 2(20.1). May 9, 2022. Permalink