High Commodity Prices And Increased Input Costs Project Thin Margins For 2022
DR. AARON SMITH
KNOXVILLE, TENNESSEE
2022 brings drastically different prices than one year ago for many row crops. At the start of January, December corn closed at $5.47 ½, up 26 percent compared to last year; November soybeans closed at $12.83 ¾, up 14.5 percent compared to last year; December cotton closed at 92.95, up 23.3 percent compared to last year; and July wheat closed at $7.55, up 20 percent compared to last year. High commodity prices are positive for farmers; however, input prices and availability continue to challenge producers planning the 2022 crop.
Fertilizer prices are double or triple last year’s prices and availability of crop protection products are providing planning issues and creating headaches for producers and ag retailers alike. Even if high prices hold, producer profitability is projected to be lower than 2021.
High commodity prices and increased input costs project thin margins for 2022. This will necessitate the need for producers to manage risk.
One key to managing risk will be avoiding the 2021 crop price trap. As decision makers we typically look at the recent past for guidance in future decisions. However, when we look at the range of outcomes for 2021, those producers that priced the majority of their crop post- harvest had greater returns than producers that priced early or priced incrementally throughout the growing season. Does this mean that marketing and risk management plans failed in 2021? No. Risk management does not result in the best-case scenario, it eliminates the severity of the potential downside loss.
So, looking to 2022 producers need to block out 2021’s price rise through the production season when designing a marketing strategy.
Could prices be higher than current offerings when 2022 harvest begins? Sure, but they could also be substantially lower, and producers will have more at risk. Production costs are 20-35 percent higher, depending on the commodity. Producers need to look at risk management strategies that fill in risk gaps. For example, between now and the crop insurance price determination period producers with no marketing have no price coverage. Does it make sense to bridge that risk using options or another tool? If a producer has purchased fertilizer at $1,000+/ton the answer is likely yes. How risk is managed in 2022 will be the single most important factor for producers this growing season. There is a lot on the line, given high commodity prices and high investment in inputs. Using risk management tools is essential for 2022.
Corn
Ethanol production for the week ending December 31 was 1.048 million barrels per day, down 11,000 from the previous week. Ethanol stocks were 21.359 million barrels, up 0.683 million compared to last week. Corn net sales reported by exporters for December 24-30, 2021, were down compared to last week with net sales of 10.1 million bushels for the 2021/22 marketing year. Exports for the same period were up 7 percent from last week at 38.8 million bushels. Corn export sales and commitments were 65% of the USDA estimated total exports for the 2021/22 marketing year (September 1 to August 31) compared to the previous 5-year average of 58 percent. Across Tennessee, average corn basis (cash price-nearby futures price) strengthened or remained unchanged at West, Northwest, West-Central, North-Central, and Mississippi River elevators and barge points. Overall, basis for the week ranged from 15 under to 31 over, with an average of 14 over the March futures at elevators and barge points. March 2022 corn futures closed at $6.06, up 13 cents since last Friday. For the week, March 2022 corn futures traded between $5.84 and $6.11. Mar/May and Mar/Dec future spreads were 1 and -49 cents. May 2022 corn futures closed at $6.07, up 12 cents since last Friday.
New crop cash prices at elevators and barge points ranged from $5.12 to $5.72. December 2022 corn futures closed at $5.57, up 11 cents since last Friday. Downside price protection could be obtained by purchasing a $5.60 December 2022 Put Option costing 54 cents establishing a $5.06 futures floor.
Soybeans
Net sales reported by exporters were down compared to last week with net sales of 14.1 million bushels for the 2021/22 marketing year – a marketing year low– and 2.5 million bushes for the 2022/23 marketing year. Exports for the same period were up 1 percent compared to last week at 64.0 million bushels. Soybean export sales and commitments were 75 percent of the USDA estimated total annual exports for the 2021/22 marketing year (September 1 to August 31), compared to the previous 5-year average of 77 percent. 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 20 under to 33 over, with an average basis of 10 over the March futures contract. March 2022 soybean futures closed at $14.10, up 71 cents since last Friday. For the week, March 2022 soybean futures traded between $13.42 and $14.15. Mar/May and Mar/ Nov future spreads were 8 and -89 cents. March 2022 soybean-to-corn price ratio was 2.33 at the end of the week. May 2022 soybean futures closed at $14.18, up 69 cents since last Friday.
Nov/Dec 2022 soybean-to-corn price ratio was 2.37 at the end of the week. New crop cash soybean prices at elevators and barge points ranged from $12.57 to $13.24. November 2022 soybean futures closed at $13.21, up 52 cents since last Friday. Downside price protection could be achieved by purchasing a $13.40 November 2022 Put Option which would cost 107 cents and set an $12.33 futures floor.
Cotton
Net sales reported by exporters were down compared to last week with net sales of 143,200 bales for the 2021/22 marketing year and 44,000 bales for the 2022/23 marketing year. Exports for the same period were down 35 percent compared to last week at 104,900 bales. Upland cotton export sales were 72 percent of the USDA estimated total annual exports for the 2021/22 marketing year (August 1 to July 31), compared to the previous 5-year average of 75 percent. Delta upland cotton spot price quotes for January 6 were 114.22 cents/lb (41-4-34) and 116.47 cents/lb (31-3-35). Adjusted world price increased 4.73 cents to 103.85 cents. March 2022 cotton futures closed at 115.12 cents, up 2.52 cents since last Friday. For the week, March 2022 cotton futures traded between 112.76 and 117.68 cents. Mar/May and Mar/Dec cotton futures spreads were -2.24 cents and -20.6 cents. May 2022 cotton futures closed at 112.88 cents, up 2.4 cents since last Friday.
December 2022 cotton futures closed at 94.52 cents, up 1.87 cents since last Friday. Downside price protection could be obtained by purchasing a 95 cent December 2022 Put Option costing 9.64 cents establishing a 85.36 cent futures floor.
Wheat
Wheat net sales reported by exporters were down compared to last week with net sales of 1.8 million bushels for the 2021/22 marketing year – a marketing year low – and 0.09 million bushels for the 2022/23 marketing year. Exports for the same period were down 37 percent from last week at 7.7 million bushels. Wheat export sales were 70 percent of the USDA estimated total annual exports for the 2021/22 marketing year (June 1 to May 31), compared to the previous 5-year average of 80 percent. Wheat cash prices at elevators and barge points ranged from $7.76 to $8.00. March 2022 wheat futures closed at $7.58, down 12 cents since last Friday. March 2022 wheat futures traded between $7.35 and $7.82 this week. March wheat-to-corn price ratio was 1.25. Mar/May and Mar/Jul future spreads were 2 and -1 cents. May 2022 wheat futures closed at $7.60, down 14 cents since last Friday. May wheat-to-corn futures price ratio was 1.25.
New crop wheat cash prices at elevators and barge points ranged from $7.17 to $7.71. July 2022 wheat futures closed at $7.57, down 7 cents since last Friday. Downside price protection could be obtained by purchasing a $7.60 July 2022 Put Option costing 62 cents establishing a $6.98 futures floor. ∆
DR. AARON SMITH: Assistant Professor, Crop Marketing Specialist, University of Tennessee