Category: Crop Marketing

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

The conflict between Russia and Ukraine has direct implications on the global supply of corn and wheat because of the relatively large quantities of those crops that those two countries produce and export. It is not surprising then that grain futures have risen sharply since the conflict began.

Neither Russia nor Ukraine are importers or exporters of cotton.  So, the war and potential disruption of Black Sea shipping should have little direct effect on cotton trade.  The impact on world cotton markets is more indirect, with a cotton price impact delayed and uncertain. 

Relative prices of major U.S. crops have changed since the conflict began.  For example, during January and early February, the ratio of CBOT Dec’22 corn to ICE Dec’22 cotton futures ranged between 5.7 and 5.9.  Historically that outcome would have been associated with 12 to 13 million acres of all U.S. cotton planted (Figure 1).  Such a level conforms to the early grower surveys of intended plantings, and also to USDA’s Outlook Forum forecast of U.S. cotton planted acreage.

More recently, however, as corn prices have risen, the corn: cotton futures price ratio has shifted higher, e.g., as of March 14, it was 6.3 (see Figure 1).  The associated level of cotton acreage is roughly a million fewer acres compared to predictions from earlier in the year. 

Now, the previous change can only happen if growers have enough time and the right technology (e.g., herbicide programs, seed availability) to adjust crop mixes at this late date.  This point highlights the generally uncertain outlook picture for 2022.  Assuming fewer cotton acres, the result would tighten up the U.S. cotton balance sheet and support summertime futures prices at higher levels than previously expected.  Over the past 10 years, U.S. cotton has been responsible for a third of global cotton exports. The weather market volatility implied by the drought in the southern plains could be significant for prices and be further exacerbated by uncertainty about input decisions.  The latter includes fuel and potash fertilizer, the costs of which could rise directly from trade disruptions out of Russia.

Robinson, John. “Indirect Effects of the European Conflict on Cotton“. Southern Ag Today 2(15.1). April 4, 2022. Permalink

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