Category: Crop Marketing

Commodity prices for corn, cotton, soybeans, and wheat are high, yet could go higher.  Put options on agricultural commodity futures are an important risk management tool for producers in today’s environment. Buyers of put options pay a “premium” for the right, but not an obligation, to sell a commodity at a specified price on a future date.  The premium price (cost) is based on five primary factors:

1. Current futures price of the underlying commodity.
2. Strike Price: Price at which the buyer can exercise the right to sell the underlying futures contract.
3. Time to Expiration: Number of days until the option expires.
4. Volatility: The variation of a trading price of the commodity over time.
5. Interest Rate: The risk-free interest rate that matches the time to expiration.

 Scenario 1, depicted in Figure 1, simulates how these five factors impact the put option premium and provide price risk management for producers.

Figure 1. Simulated Put Option Premiums – Various Strike Prices on Single Date. Author calculations.

On March 17, 2022, September 2022 Corn futures (CU22) were trading for $6.49 per bushel.  The days to expiration are 162 days or 44.4% of a year.  The volatility is 36.79% and the risk-free interest rate is 0.50%.  An at-the-money (ATM) put option ($6.50) would be priced at $0.63 per bushel, while an out-of-the-money (OTM) put options ($6.40) would be $0.58 per bushel.

 Scenario 2 (Figure 2) illustrates how the put premium changes over time, if the market price, volatility, and interest rate remain at the March 17, 2022, values.

Figure 2. Simulated Put Option Premiums – Time Premium over Multiple Dates. Author calculations.

The risk that futures prices, volatility, or interest rates could change diminishes as the days to expiration decreases. With less time there is less risk and premiums decrease.  Scenario 2 shows the put premium dropping about $0.01 per bushel per week based on time. 

Assume a producer buys a $6.50 September 2022 put option on March 17, 2022, for $0.63 per bushel.  The producer will receive $6.50 if the option expires worthless on August 26, 2022.  The effective price would be $5.87 after deducting the put option cost of $0.63 from the strike price of $6.50.

An effective price of $5.87 is not attractive when the current futures price is $6.49.  But the buyer of a put option can sell his option before expiration and realize a higher effective price which makes buying puts a valuable risk management tool. Figure 3 illustrates how put option premiums change as time diminishes and futures prices fluctuate.   The table maintains volatility and interest rates at the March 17^th levels.

On April 16^th, if September 2022 corn futures are still trading at $6.49, the producer could sell the put option for $0.57 and price his corn for $6.49 for a net price of $6.43 plus basis (Sell for $6.49 minus $0.63 cost to buy plus $0.57 for selling the put).  If the price rallies to $6.79, the net option loss increases to $0.18 per bushel (Sold for $0.45 and bought for $0.63) but the net price increases to $6.61 per bushel (Sold for $6.79 less $0.18 net put premium cost). If the price drops to $6.19, the gain on the put premium is $0.09 (Sold for $0.72 and bought for $0.63) and the net price is $6.28 (Sold for $6.19 plus $0.09 net put premium gain)

Figure 3. Simulated Put Option Premiums – Single Strike Price, Multiple Dates & Futures Prices. Author calculations.

Buying put options provides buyers protection against lower prices.  The premiums can be high, especially when volatility and time to expiration are high.  But when used for short periods of time, the premiums can retain a significant portion of their value. Buying put options requires no margin deposits although the premium is paid when purchased.  Put options are an important risk management tool for creating minimum price floors over short periods of time. 

Mickey, Scott A. . “Using Put Options for Risk Management“. Southern Ag Today 2(14.1). March 28, 2022. Permalink

Peanut production was up 4% in the United States in 2021, compared to 2020, as shown in Table 1. This was driven by strong yields nationwide of 4,135 lbs. per acre, just off the 2012 record of 4,211 lbs. per acre. Georgia – the largest peanut producing state – saw a 2% increase in production. This pushed the U.S. average up, as Georgia produces about half of the nation’s peanuts. The increased production comes despite a 5% decrease in peanut planted acreage nationwide. All three main peanut production regions saw declines in acreage, with the Southeast seeing a 5% decline driven by Georgia’s 7% dip.

Table 1. U.S. Peanut Production (thousand tons)

The strong production, however, has been combined with decreased use that is expected to increase peanut stocks. Peanut use is expected to decline by 4% this marketing year, primarily due to a 5% forecasted decrease in exports. However, food disappearance is expected to increase by 1% from 2020. Increases in consumption of peanut butter (5%), peanut candy (4%), and peanut snacks (3%) drove the domestic peanut food demand increase during the 2020-2021 marketing year, as shown in Figure 1. The peanut butter consumption increase follows the similar-sized increases observed the previous year, as demand has increased throughout the COVID-19 pandemic. Peanut stocks are expected to increase by 5% to 1.1 million tons, which is still a manageable level for the industry.

  Figure 1. U.S. Peanut Food Consumption by Product and Marketing Year

Sawadgo, Wendiam. “Peanut Production Up in 2021 Despite Lower Acreage“. Southern Ag Today 2(13.1). March 21, 2022. Permalink

Global commodity markets have been affected by the Russian invasion of Ukraine on February 24, 2022. Energy prices have skyrocketed.  The American Automobile Association estimated the national average gas price in the United States at $4.32/gallon on March 10. Implications of the conflict are far reaching, affecting nearly all aspects of the global economy. Agricultural producers have been affected on two fronts, input prices (fuel, fertilizer, etc.) and commodity prices (wheat, corn, and soybeans). The focus of this article is the impact on grain and oilseed markets and marketing tools that producers may want to consider to help mitigate price risk.

Ukraine is an important producer and exporter of wheat, corn, barley, and sunflower seed products.  Table 1 shows Ukraine’s share of world production and their share of world exports for these commodities. While Ukrainian corn represents only 3.5% of world production, it accounts for 13.8% of world exports.  Meanwhile, Ukraine produces almost a third of the world’s sunflower seed, which is then turned into about half of the world’s meal and oil exports.  Sunflower seed oil production and exports in Ukraine have some ramifications for soybean oil and soybean prices as imperfect substitutes.

Table 1. Ukraine’s Share of World Production and Exports for Select Commodities, 2021/22

	Wheat	Barley	Corn	Sunflower Seed	Sunflower Seed Meal	Sunflower Seed Oil
Production	4.2%	6.8%	3.5%	30.6%	27.5%	30.6%
Exports	9.8%	16.7%	13.8%	4.8%	58.0%	47.3%

Source: USDA PSD https://apps.fas.usda.gov/psdonline/app/index.html#/app/home

Volatility in corn, wheat, and soybean futures markets have been extreme (Figures 1-3). For example, daily price changes for July wheat for the past ten trading days have been: -75, 67, 50, 74.25, 75, 59, 77.25, -57.25, -85, and -67.5 cents. Extreme volatility can make marketing decisions challenging and potentially expensive. However, volatility also often provides opportunities for profit. Three months ago, every farmer would have jumped at the ability to sell wheat futures at $9.00; now farmers can set a futures price floor at $9.62. Purchasing put options is expensive – $1.48 for an at-the-money put as of March 9. However, with a gap between the fall crop insurance price of $7.14 and current market offerings of $11.10, taking some additional downside risk off the table while leaving the top side open is a prudent move.

Corn and soybean projected crop insurance prices were set 10 days ago at $5.90 and $14.33, respectively. Harvest futures prices on March 10 were $6.50 for corn and $14.95 for soybeans, an increase of 60 and 62 cents, respectively. Producers should be asking themselves at what point they should take some additional price risk off the table. Being too aggressive with setting prices (i.e. cash forward contracts and short hedges) should be approached cautiously as producers need to avoid exchanging price risk for production risk or selling their way out of a bull market. However, managing the downside price risk should be on every producer’s mind, particularly with input prices at elevated levels.

Grain and oilseed markets are likely to remain unpredictable, due to uncertainty generated from the Russia-Ukraine conflict. Producers should consider how much of the 2022 crop they are comfortable pricing at this point in the year and how they can protect the downside of this market while keeping the upside open. Options strategies will be expensive but should be fully explored based on current market conditions.

Figure 1. Daily July Wheat Futures, January 3 to March 10, 2022

References and Resources:

USDA – Foreign Agricultural Services. Production, supply, and distribution (PSD). Accessed at: https://apps.fas.usda.gov/psdonline/app/index.html#/app/home

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

AAA – https://gasprices.aaa.com/

Smith, Aaron. “Ukraine-Russia Implications in Grain and Oilseed Markets“. Southern Ag Today 2(12.1). March 14, 2022. Permalink

Production and supply of a crop is a critical component for the market outlook for every marketing year.  For the cotton crop, U.S. planted acreage outcome is a major part of the global cotton production and supply.

Grower surveys are one common method for predicting cotton planted acreage. One of the earliest publicly available grower planting intentions surveys is measured in December by Cotton Grower magazine and published in early January.  Similarly, the National Cotton Council measures grower intentions in the weeks before and after New Year’s Day and publishes the result in February.  In 2022, these two surveys measured 12.5 million and 12.0 million planted acres of U.S. all cotton (upland and Pima combined), respectively.  USDA will subsequently measure grower planting intentions in March, and then survey planted acreage in June.

A second approach to predicting cotton plantings is by focusing on the relative price of competing crops.  In the eastern half of the Cotton Belt, cotton competes largely with corn, soybeans, and peanuts.   In the Southern Plains region, the major alternatives are corn, sorghum, and wheat-fallow.  A simple method for predicting cotton plantings is, for example, matching the ratio of new crop corn and cotton future prices to U.S. cotton plantings (Figure 1). So far, the Dec’22 CBOT corn/Dec’22 ICE cotton futures price ratio has been ranging between 5.7 and 5.9 during the first quarter of 2022.  Assuming the price ratio stays at that level, history suggests an outcome of between 12 and 13 million planted acres of U.S. all cotton (see Figure 1). This is similar to the early surveys of growers.

Note that the dryer-than-normal conditions in the central and western Cotton Belt, along with an insurance price above $1.00 per pound, could add 500,000 to 1,000,000 planted acres in the Southern Plains region, albeit with uncertainty in the abandoned acres at the end of the season due to possible drought impacts.

Assuming 13 million planted acres in the U.S. with an average/higher abandonment (20%) and 10-year average yield (850 lbs), the U.S. would produce over 18 million bales of cotton in 2022, with over 21 million bales of supply.  Assuming U.S. domestic spinning is 2.6 million bales and U.S. exports are 15 million bales, the result could be another year of U.S. ending stocks around four million bales.  That year-over-year change in ending stocks would be considered price neutral.  This year that suggests that new crop futures prices may be fundamentally supported at historically high levels, with weather market speculation providing additional upside volatility.

Figure 1. Ratio of December Corn/Cotton Futures and All Cotton Planted Acreage in the United States

Robinson, John. “U.S. Cotton Planted Acres“. Southern Ag Today 2(11.1). March 7, 2022. Permalink

For many feed grain producers, 2021 was a profitable year; however, the uncertainty and risk associated with the 2022 corn crop is elevated. Following is a look at how the components of the supply and demand balance sheet might provide price direction as we head into the new crop season.  Importantly, is there a likelihood of an increase in ending stocks that puts downward pressure on prices, or might stocks get tighter and prices go higher? 

USE:  U.S. corn use over the last six years has ranged from a low of 14.0 billion bushels (2019/20) to a high of 14.8 billion bushels (2017/18, 2020/21, 2021/22).  Domestic use over this time frame is little changed, varying in a range from 12.1 to 12.4 billion bushels. 

Looking at the major use categories, growth in the corn for fuel use category seems limited due to uncertainty around the Renewable Fuel Standard and gasoline demand projections.  With rising fuel-efficiency ratings and a growing number of vehicles on the road that do not use gasoline, the Energy Information Administration forecasts motor gasoline demand in the U.S. (the foundation of ethanol demand) to decline over the next several years in its Annual Energy Outlook (https://www.eia.gov/outlooks/aeo/). 

Impacting the corn for feed category is a decline in grain consuming animal units (GCAU) over the last two years and a decline in energy feed per GCAU over the last five years (https://www.ers.usda.gov/data-products/feed-grains-database/). 

Food, seed, and industrial use (other than ethanol) have held steady in a range from 1.415 to 1.453 billion bushels since 2016.

Exports have been the use category with the most variability over the last several years and have therefore had the most impact on ending stocks. U.S. corn exports hit an all-time record high in 2020/21 at 2.753 billion bushels. Corn production from the top four competitors for U.S. corn exports: Brazil, Argentina, Ukraine, and Russia, is forecasted to be at record high levels in 2021/22, while U.S. exports are projected to be back down to 2.425 billion bushels. High corn prices provide incentives for producers all around the world to increase acres.  At the time of this writing, the conflict between Russia and Ukraine has the potential to upset grain flows from the Black Sea region, an important component of the global grain trade.  

SUPPLY:  One of the greatest areas of uncertainty for 2022 is the impact of record-high fertilizer prices and crop input availability. How will this impact farm productivity, profitability, and planting decisions? Will farmers opt for crops that are less fertilizer intensive given these high input costs? Will herbicide cost and availability shift planting decisions to crops with a wider range of alternative crop production systems that are less reliant on over-the-top herbicides? The current ratio of soybean to corn prices suggests net farm returns are about equal between these two crops in Midwest crop budgets (farmdoc dailyhttps://farmdocdaily.illinois.edu/2021/12/2022-updated-crop-budgets.html).  Late-spring input pricing and input product dealer inventories may keep the acreage question unanswered longer than normal this spring.  

ENDING STOCKS AND PRICE:  If farmers plant about the same number of corn acres in 2022 as 2021 (about 93 million), we once again achieve a trendline yield (about 179 bushels per acre), and projected use holds steady in 2022 as currently projected for 2021, total production would exceed the 14.8 billion bushels of projected use. That would increase ending stocks in 2022 and fundamentally put downward pressure on prices.  

RISK MANAGEMENT:  A primary area of financial risk in 2022 is that producers will have locked in high input costs early in the season only to see prices fall significantly by harvest. This highlights the importance of a two-prong approach to risk management. First, focus on cost management and input use efficiency while maintaining productivity. This is to get the break-even cost as low as possible. Second, have an accurate estimate of break-even cost and a plan and the tools in place to not let profitable price opportunities get away.  

Welch, J. Mark. “2022 Corn Outlook“. Southern Ag Today 2(10.1). February 28, 2022. Permalink