Risk And Reward Should Be Fully Understood Before A Producer Enters Any Futures Or Options Position
DR. AARON SMITH
KNOXVILLE, TENNESSEE
What should you do if you don’t have access to storage? I often get questions about marketing strategies for producers that do not have storage. First, it should be stated that over the past 10-years storage has been a very powerful marketing tool for Tennessee corn and soybean producers. The average increase in soybean prices at elevators and barge points, over the past 10-years, from the harvest low to March is $0.96/but; corn has averaged an increase of $0.67/bu.
Additional increases occur later in the year with corn peaking, on average, in June at $0.84/but above the harvest low and soybeans in May at $1.23/but above the harvest low. Each year is unique, and the cost of storage needs to be considered, but average corn and soybean price increases in the past ten years warrants consideration for investment in on farm storage.
For producers without on farm storage, delayed pricing alternatives, with a local elevator, barge point, or another purchaser, can be considered. Delayed pricing allows the producer to fix the price after delivery at a future point in time. As with any legal contract, attention to contract details is important to fully understand as there can be variance in terms and conditions offered. Additionally, counter party 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.
Another alternative is commercial storage. Storage rates are highly variable, based on facilities provided, however with the Tennessee corn crop down substantially, due to drought, renting storage may be an option in some areas.
Futures and options can be used to take an 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 crop is sold. For example, buying a March contract at $6.90 can provide a financial gain if the March futures contract increases (buying low and selling high).
This is a speculative position. Similarly, buying a call option can reduce the risk of downside losses, if prices decline, but will cost the producer an upfront premium. For example, a $6.90 March corn call could be purchased for 39 cents, thus the March futures contract would need to be above $7.29 before a financial benefit to the purchaser is received. Both strategies have advantages and disadvantages and can be refined to reduce premium cost or protect against downside losses. The risk and reward should be fully understood before a producer enters any futures or options position.
Futures prices as at close Thursday September 1.
Corn
Ethanol production for the week ending August 26 was 0.970 million barrels per day, down 17,000 from the previous week. Ethanol stocks were 23.533 million barrels, down 274,000 compared to last week. Nationally, the Crop Progress report estimated corn condition at 54 percent good-to-excellent and 19 percent poor-to-very-poor; corn dough at 86 percent compared to 75 percent last week, 90 percent last year, and a 5-year average of 88 percent; corn dented at 46 percent compared to 31 percent last week, 56 percent last year, and a 5-year average of 52 percent; and corn mature at 8 percent compared to 4 percent last week, 8 percent last year, and a 5-year average of 9 percent. In Tennessee, corn condition was estimated at 29 percent good-to- excellent and 42 percent poor-to-very poor; corn dough at 97 percent compared to 92 percent last week, 98 percent last year, and a 5-year average of 97 percent; corn dented at 80 percent compared to 60 percent last week, 79 percent last year; and a 5-year average of 81 percent; corn mature at 28 percent compared to 9 percent last week, 22 percent last year and a 5-year average of 29 percent. Across Tennessee, average corn basis (cash price-nearby futures price) weakened or remained unchanged at West, Northwest, West-Central, North- Central, and Mississippi River elevators and barge points. Overall, basis for the week ranged from 35 to 50 over, with an average of 40 over the September futures at elevators and barge points. New crop cash prices ranged from $6.50 to $7.01 at elevators and barge points.
December 2022 corn futures closed at $6.58, down 6 cents since last Friday. For the week, December 2022 corn futures traded between $6.54 and $6.83. Downside price protection could be obtained by purchasing a $6.60 December 2022 Put Option costing 37 cents establishing a $6.23 futures floor. Dec/Mar and Dec/Dec future spreads were 5 and -49 cents. March 2023 corn futures closed at $6.63, down 6 cents since last Friday. December 2023 corn futures closed at $6.09, down 7 cents since last Friday.
Soybeans
Across Tennessee, average soybean basis strengthened or remained unchanged at West, Northwest, West-Central, North-Central, and Mississippi River elevators and barge points. Basis ranged from 48 under to 10 over, with an average basis of 14 under the September futures contract. Nationally, the Crop Progress report estimated soybean condition at 57 percent good-to-excellent and 13 percent poor- to-very poor; soybeans setting pods at 91 percent compared to 84 percent last week, 92 percent last year, and a 5-year average of 92 percent; and soybeans dropping leaves at 4 percent compared to 8 percent last year and a 5-year average of 7 percent. In Tennessee, soybean condition was estimated at 47 percent good-to-excellent and 20 percent poor-to-very poor; soybean setting pods at 92 percent compared to 80 percent last week, 89 percent last year, and a 5-year average of 90 percent; and soybeans dropping leaves at 8 percent compared to 1 percent last week, 9 percent last year, and a 5-year average of 7 percent. Nov/Dec 2022 soybean-to-corn price ratio was 2.12 at the end of the week. New crop cash soybean prices at elevators and barge points ranged from $13.94 to $14.73. November 2022 soybean futures closed at $13.94, down 67 cents since last Friday. For the week, November 2022 soybean futures traded between $13.90 and $14.60. Downside price protection could be achieved by purchasing a $14.00 November 2022 Put Option which would cost 53 cents and set a $13.47 futures floor. Nov/Jan and Nov/Nov future spreads were 5 and -59 cents.
January 2023 soybean futures closed at $13.99, down 66 cents since last Friday. November 2023 soybean futures closed at $13.35, down 37 cents since last Friday. November/December 2023 soybean-to-corn price ratio was 2.19 at the end of the week.
Cotton
Delta upland cotton spot price quotes for September 1 were 116.29 cents/lb. (41-4-34) and 118.54 cents/lb. (31-3-35). Adjusted world price (AWP) was up 0.38 cents at 104.86 cents. Nationally, the Crop Progress report estimated cotton condition at 34 percent good-to- excellent and 36 percent poor-to-very poor; cotton setting bolls at 94 percent compared to 88 percent last week, 85 percent last year, and a 5-year average of 91 percent; and cotton bolls opening at 28 percent compared to 19 percent last week, 20 percent last year, and a 5-year average of 24 percent. In Tennessee, cotton condition was estimated at 48 percent good-to-excellent and 20 percent poor-to-very poor; cotton setting bolls at 97 percent compared to 95 percent last week, 96 percent last year, and a 5-year average of 98 percent; and cotton bolls opening at 13 percent compared to 7 percent last week, 5 percent last year, and a 5-year average of 13 percent. December 2022 cotton futures closed at 106.53 cents, down 11.15 cents since last Friday. For the week, December 2022 cotton futures traded between 108.21 and 118.53 cents. Dec/Mar and Dec/Dec cotton futures spreads were -1.39 cents and -22.42 cents. Downside price protection could be obtained by purchasing a 107 cent December 2022 Put Option costing 7.33 cents establishing a 99.67 cent futures floor.
March 2023 cotton futures closed at 105.14 cents, down 9.23 cents since last Friday. December 2023 cotton futures closed at 84.11 cents, down 6.39 cents since last Friday.
Wheat
Nationally, the Crop Progress report estimated spring wheat condition at 68 percent good-to-excellent and 6 percent poor-to-very poor; spring wheat harvested at 50 percent compared to 33 percent last week, 86 percent last year, and a 5-year average of 71 percent. Wheat cash prices at elevators and barge points ranged from $7.48 to $8.28. December 2022 wheat futures closed at $7.91, down 14 cents since last Friday. December 2022 wheat futures traded between $7.94 and $8.49 this week. December wheat-to-corn price ratio was 1.20. Dec/Mar and Dec/Jul future spreads were 20 and 32 cents.
March 2023 wheat futures closed at $8.11, down 10 cents since last Friday. New crop wheat cash prices at elevators and barge points ranged from $7.77 to $8.40. July 2023 wheat futures closed at $8.23, down 8 cents since last Friday. Downside price protection could be obtained by purchasing an $8.30 July 2023 Put Option costing 103 cents establishing a $7.27 futures floor. ∆
DR. AARON SMITH: Assistant Professor, Crop Marketing Specialist, University of Tennessee