What a rally! December corn futures have rallied a magnificent 84 cents since May 18. The threat of drought continues over key growing regions of the United States with more than half of the nation’s corn crop now growing under drought conditions, and the extended forecasts are trending hotter and dryer as corn heads into pollination.
U.S. corn crop record out the window
The 181.5 bushel per acre yield number is the current number pegged for the 2023/24 crop year, by the USDA, as of the June 2023 WASDE report. They will likely reduce that number in the July WASDE report, but it may be too soon to assume a dramatic cut to yield, at least on paper anyway. How will the USDA respond in July? Will there be satellite imagery available to help show a more tangible yield estimate? Will yield fall substantially? Or will small, timely rains occur to keep the U.S. corn crop alive?
Keep in mind, there will also be a planted acreage report on June 30 to throw into the mix, which could either add or subtract planted acres for the 2023/24 crop year.
Two yield scenarios to consider
Right now, heading into the three-day holiday weekend (the markets are closed on Monday for the Juneteenth holiday), trade is trying to guesstimate potential yield loss due to the dry conditions, versus a forecast for a decent chance of rain in the coming days.
If we use the current USDA supply/demand spreadsheet, and keep all things the same, except reduce yield from the current 181.5 bpa to 176 bpa, then new crop ending stocks come in at 1.793 billion bushels.
Yes, that is less than the current number of 2.257 billion bushels (which the market is already pricing in thanks to this recent rally) but is still comfortably larger than the 1.452 billion bushels pegged for the 2022/23 old crop year.
If yield comes in the same as last year, at 173.3 billion bushels (that was with the drought in Nebraska and parts of South Dakota and western Iowa), then new crop ending stocks would come in at 1.531 billion bushels, still larger than the current old crop ending stocks number.
How does a farmer manage this?
An uncertain size corn crop growing in the fields nerve-wracking for any producer. It is hard to market what you are unsure will grow. It makes forward contracting potentially uneasy because if the crop doesn’t grow, you’re still on the hook to deliver corn to the elevator.
But what if the expected rain this weekend is just enough to keep the crop hanging on for another week or two? Rain on the radar this weekend might weigh bearish on trader mindset, and push prices lower next week.
When you consider that December 2023 corn futures have rallied over 84 cents, there is reason a producer may want to protect this recent rally, especially if the weather forecasters switch to a rainier pattern for late June.
One way to do that is to buy a put. Remember, if you’re buying a put, you’re protecting a price floor for your grain. And if the market should instead trade higher due to drought, you are not dealing with margin calls, you are able to take part in the rally with your cash sales. However, if the rains occur, you’ll be thankful you have a price floor protected.
Consider price protection with a short dated put
Short-dated options are gaining more relevance and importance as a tool you might employ to help shift risk or manage opportunity. As with any marketing tool, there are pros and cons that need to be measured. Let’s first explain what a short-dated option is and how it works.
The term “short-dated” refers to a shorter window before the option’s traditional last trading day, otherwise known as option expiration. You’re able to protect new crop December 2023 corn futures prices, yet with a shorter window of time.
For example, if you were to buy traditional December 2023 corn put, it would expire on November 24, 2023. With the short-dated options, you are still protecting December 2023 corn futures prices, but they cost less, because they expire much sooner than November 24, 2023. Therefore, you’re paying less time value in the cost of the option premium itself.
The July short-dated option expires on June 23, 2023
The August short-dated option expires on July 21, 2023
The September short-dated option expires on August 25, 2023
Strategize with your grain market adviser
Full visibility of how short-dated options work (puts or calls and whether it is purchased or sold) and the associated risks are critical to understand for proper implementation. A big benefit is that short-dated options can provide farmers an opportunity to reduce out of pocket cost, and still protect a price floor.
They may be useful for such events as upcoming USDA reports, near-term weather events, or any other situation where protection for a shorter period of time may be warranted. Because you’re buying a shorter time period of coverage, they cost less, and you’ll save money (relative to a traditional option).
We can never outguess what a market will do, or what Mother Nature has in store for us, but using risk management and being prepared to protect value is something within your control.
Reach Naomi Blohm at 800-334-9779, on Twitter: @naomiblohm, and at [email protected].
Disclaimer: The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Individuals acting on this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report. Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Examples of seasonal price moves or extreme market conditions are not meant to imply that such moves or conditions are common occurrences or likely to occur. Futures prices have already factored in the seasonal aspects of supply and demand. No representation is being made that scenario planning, strategy or discipline will guarantee success or profits. Any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to Total Farm Marketing. Total Farm Marketing and TFM refer to Stewart-Peterson Group Inc., Stewart-Peterson Inc., and SP Risk Services LLC. Stewart-Peterson Group Inc. is registered with the Commodity Futures Trading Commission (CFTC) as an introducing broker and is a member of National Futures Association. SP Risk Services, LLC is an insurance agency and an equal opportunity provider. Stewart-Peterson Inc. is a publishing company. A customer may have relationships with all three companies. SP Risk Services LLC and Stewart-Peterson Inc. are wholly owned by Stewart-Peterson Group Inc. unless otherwise noted, services referenced are services of Stewart-Peterson Group Inc. Presented for solicitation.
The opinions of the author are not necessarily those of Farm Futures or Farm Progress.
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