October 19, 2022
As we move past the halfway point of harvest, hopefully you will have a good handle on where their corn and bean production will end up. This will allow you to develop a game plan for managing pricing risk.
With the economic situation we find the world in, we believe the extreme moves we have been seeing will continue into 2023. The question is – will the action be higher or lower?
In the October WASDE report, USDA adjusted both corn supply and demand categories, ending with a 1.178 billion bushel ending stocks estimate. This put the stocks-to-use ratio at 8.28%, which is the lowest since 2011-2012 and 1995.
With ending stocks projected to end up this tight, indicating that the supply is overstated or demand understated could lead to a potentially explosive surge higher.
On the other hand, if demand is overstated due to an economic slowdown in the U.S. or worldwide, the carryout could be revised higher. If the weather in South America cooperates, allowing production to rebound after last year's drought-ravaged crop, we could see prices work lower into next spring as well.
Record-low river levels
U.S. river logistics could also impact the ability to move grain out of the country. The Mississippi river level dropped to the lowest on record this past week at Memphis. Barges are moving, but at a lower-than-normal draft, affecting the grain movement's efficiency.
Reown grain with options
So, what do you do with unsold corn bushels that you cannot store? With the lack of carrying from December to July, we would encourage producers to listen to the market, price the corn now, and look to renown them with July options.
If you calculate the cost of storing the corn commercially to the end of the year and add in drying and shrink expenses, you will find that owning a vertical corn option strategy is less expensive and lowers your overall equity risk compared to having corn in commercial storage.
For example, an elevator charges 28 cents plus drying and shrinks to commercially store corn until the end of the year, or roughly 74 days. If the market rallies at least 28 cents between now and the end of the year, the commercial storage play will have paid off.
On the other hand, if the market breaks, say, 50 cents, you are out the 50 cents plus the 28-cent storage fee. If you choose to store the grain into 2023, you will incur additional storage costs and still have unlimited downward price risk.
Instead of incurring storage charges, another idea would be to market the grain right out of the field and then use the options market to maintain some ownership in the market. If you choose this route, consider using a July $7.00/$8.00 vertical call spread, currently trading at less than 30 cents.
This will allow you to add up to 70 cents to your cash price if the July futures are above $8.00 at expiration. If the market ends below $7.00 at expiration, your option will expire worthless. But unlike grain stored in the commercial market, your risk is fixed at 30 cents.
Soybean marketing strategies
As for the soybeans, the October WASDE stocks came in unchanged at 200 million bushels with a stocks-to-use ratio of 4.5%, representing a 16.5-day supply. It was only tighter in 2003, 2008, and 2012-2014. Like corn, if the soybean supply is overstated or demand understated, we could see an explosive move higher.
On the other hand, the USDA is projecting that the world-soybean ending stocks are expected to increase to 8 MMT by the end of next year based on the assumption that South America will produce a record crop this upcoming winter.
If a record South American crop materializes and the world economy continues to weaken, prices could weaken dramatically. In this scenario, prices could fall back to the summer lows.
With this in mind, producers storing soybeans are encouraged to implement options strategies such as a vertical put spread which will mitigate downward price risk but keep the upside open. If you have aggressively marketed soybeans, you might consider a vertical call spread option strategy that will enable you to add to your sale prices if the market moves higher this winter.
Current forecasts are for the La Nina weather pattern to stick around for the third year, which could wreak havoc on the South American crop, forcing demand back to the U.S. shores and driving price higher.
If you have questions, don't hesitate to contact me directly at 815-665-0461 or anyone on the AgMarket.Net team at 844-4AGMRKT.
The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. AgMarket.Net is the Farm Division of John Stewart and Associates (JSA) based out of St Joe, MO and all futures and options trades are cleared through ADMIS in Chicago IL. This material has been prepared by an agent of JSA or a third party and is, or is in the nature of, a solicitation. By accepting this communication, you agree that you are an experienced user of the futures markets, capable of making independent trading decisions, and agree that you are not, and will not, rely solely on this communication in making trading decisions. Past performance, whether actual or indicated by simulated historical tests of strategies, is not indicative of future results. Trading information and advice is based on information taken from 3rd party sources that are believed to be reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. The services provided by JSA may not be available in all jurisdictions. It is possible that the country in which you are a resident prohibits us from opening and maintaining an account for you.
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