December Corn And Cotton Set New Contract Highs This Week
DR. AARON SMITH
KNOXVILLE, TENNESSEE
December corn and cotton set new contract highs this week. The current trend for new crop corn and cotton is undoubtedly bullish. However, producers will need to consider when to remove additional price risk during the growing season. The price risk gap between projected crop insurance prices and current futures market prices has widened substantially. December cotton is trading at 115 cents, 12 cents above the crop insurance price; December corn is trading at $7.10, $1.20 above the crop insurance projected price. Many producers will have an additional crop insurance price determination period this fall.
However, a lot can happen between now and October (prices could peak and then decline into harvest, creating an inverted “V” chart pattern), thus, providing no price protection at the current elevated prices.
The question on many producers’ minds is when and at what price should I make additional sales or remove price risk. While there is no one size fits all answer, strong consideration should be given for additional sales to cover input purchases or use. Because input prices are high and volatile, it is a solid risk management strategy to layoff price risk in commodity markets when input costs occur. Many producers will have inputs purchased already, so some expenses are largely known. Making sales (or preferably establishing a price floor) will remove some off the financial risk should commodity markets decline during the growing season.
For example, a $6.80 December corn put option can be purchased for 55 cents establishing a $6.25 futures floor. This will partially bridge the price gap between the current futures market price and the projected crop insurance price, leave the upside of the market open, leave basis unfixed, and will not result in additional production risk. Additionally, the position could be exited at a later date and part of the premium recovered. Option strategies can be made more complexed to reduce premium costs, however it is important to understand the risks and tradeoffs for the options strategy employed. Working with a qualified broker or consultant is strongly suggested.
Corn
Ethanol production for the week ending April 4 was 1.003 million barrels per day, down 33,000 from the previous week. Ethanol stocks were 25.903 million barrels, down 0.626 million compared to last week. Corn net sales reported by exporters for March 25-31, 2022, were up compared to last week with net sales of 30.8 million bushels for the 2021/22 marketing year and 5.7 million bushels for the 2022/23 marketing year. Exports for the same period were down 13 percent from last week at 64.3 million bushels. Corn export sales and commitments were 86 percent 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 88 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 35 under to 30 over, with an average of even the May futures at elevators and barge points. May 2022 corn futures closed at $7.68, up 33 cents since last Friday. For the week, May 2022 corn futures traded between $7.34 and $7.73. May/Jul and May/Dec future spreads were -8 and -52 cents. July 2022 corn futures closed at $7.60, up 39 cents since last Friday.
Nationally, the Crop Progress report estimated corn planted at 2 percent compared to 2 percent last year and a 5-year average of 2 percent. New crop cash prices at elevators and barge points ranged from $6.64 to $7.24. December 2022 corn futures closed at $7.16, up 28 cents since last Friday. Downside price protection could be obtained by purchasing a $7.20 December 2022 Put Option costing 80 cents establishing a $6.40 futures floor.
Soybeans
Net sales reported by exporters were down compared to last week with net sales of 29.4 million bushels for the 2021/22 marketing year and 11 million bushes for the 2022/23 marketing year. Exports for the same period were up 24 percent compared to last week at 30.6 million bushels. Soybean export sales and commitments were 99 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 93 percent. Across Tennessee, average soybean basis weakened at West elevators and barge points and strengthened or remained unchanged at Northwest, West-Central, North-Central, and Mississippi River elevators and barge points. Basis ranged from 15 under to 37 over, with an average basis of 12 over the May futures contract. May 2022 soybean futures closed at $16.89, up 107 cents since last Friday. For the week, May 2022 soybean futures traded between $15.76 and $16.89.
May/Jul and May/Nov future spreads were -21 and -194 cents. May 2022 soybean-to-corn price ratio was 2.20 at the end of the week. July 2022 soybean futures closed at $16.68, down 102 cents since last Friday.
Nov/Dec 2022 soybean-to-corn price ratio was 2.09 at the end of the week. New crop cash soybean prices at elevators and barge points ranged from $14.13 to $15.01. November 2022 soybean futures closed at $14.95, up 89 cents since last Friday. Downside price protection could be achieved by purchasing a $15.00 November 2022 Put Option which would cost 108 cents and set a $13.92 futures floor.
Cotton
Net sales reported by exporters were down compared to last week with net sales of 62,900 bales for the 2021/22 marketing year and 64,400 bales for the 2022/23 marketing year. Exports for the same period were up 38 percent compared to last week at 455,500 bales – a marketing year high. Upland cotton export sales were 103 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 99 percent. Delta upland cotton spot price quotes for April 7 were 133.2 cents/lb. (41-4-34) and 135.45 cents/lb. (31-3-35). Adjusted world price decreased 0.47 cents to 130.42 cents. May 2022 cotton futures closed at 132.41 cents, down 2.14 cents since last Friday. For the week, May 2022 cotton futures traded between 132.3 and 140.45 cents. May/Jul and May/Dec cotton futures spreads were -1.35 cents and -16.93 cents. July 2022 cotton futures closed at 131.06 cents, up 0.13 cents since last Friday.
Nationally, the Crop Progress report estimated cotton planted at 4 percent compared to 6 percent last year and a 5-year average of 6 percent. December 2022 cotton futures closed at 115.48 cents, up 4.8 cents since last Friday. Downside price protection could be obtained by purchasing a 116 cent December 2022 Put Option costing 12.33 cents establishing a 103.67 cent futures floor.
Wheat
Wheat net sales reported by exporters were up compared to last week with net sales of 5.7 million bushels for the 2021/22 marketing year and 8.2 million bushels for the 2022/23 marketing year. Exports for the same period were down 11 percent from last week at 11.4 million bushels. Wheat export sales were 89 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 101 percent. Wheat cash prices at elevators and barge points ranged from $9.40 to $9.76.
May 2022 wheat futures closed at $10.51, up 67 cents since last Friday. May 2022 wheat futures traded between $10.17 and $10.74 this week. May wheat-to-corn price ratio was 1.37. May/Jul and May/Sep future spreads were 8 and 5 cents.
Nationally, the Crop Progress report estimated winter wheat condition at 30 percent good-to-excellent and 36 percent poor-to-very poor; winter wheat headed at 4 percent compared to 4 percent last year and a 5-year average of 3 percent; and spring wheat planted at 3 percent compared to 3 percent last year and a 5-year average of 2 percent. In Tennessee, winter wheat condition was estimated at 75 percent good-to- excellent and 6 percent poor-to-very poor; and winter wheat jointing at 33 percent. New crop wheat cash prices at elevators and barge points ranged from $9.10 to $10.14. July 2022 wheat futures closed at $10.59, up 75 cents since last Friday. Downside price protection could be obtained by purchasing a $10.60 July 2022 Put Option costing 99 cents establishing a $9.61 futures floor. September 2022 wheat futures closed at $10.56, up 82 cents since last Friday. ∆
DR. AARON SMITH: Assistant Professor, Crop Marketing Specialist, University of Tennessee