March weather came in like a lion last week. But the animal of choice for grain markets was the bear. December corn slipped to new six-month lows while November soybeans remained mired in a trading range 75 cents below last year’s contract highs.

Despite the setback, prices are still profitable on paper for the average grower. And with crop insurance and farm program decisions due March 15, it’s time for a gut check on your 2023 crop marketing plan.

Spring prices for crop insurance, based on average February new crop futures, were fixed near the highest levels in a decade. The latest data from the Risk Management Agency shows the number of policies already at 95% of last year’s final level, with Revenue Protection the overwhelming favorite, accounting for more than 80% of the business. Plans roll over from 2022 unless changes are made by the sales closing date, so there’s still time to tweak policies.

Most growers seem likely to again select ARC-County as their farm program alternative, used on 60% of corn acres and nearly 85% of soybeans last year. Benchmark prices for both crops are higher, while PLC reference prices remain the same a $3.70 for corn and $8.40 for soybeans. PLC base acres usually are lower too.

Coupling insurance with government farm program selection allows producers to fine tune risk from different marketing strategies, depending on harvest prices and yields. Assuming average production costs of $4.92 per bushel corn and $11.29 soybeans, this sensitivity analysis shows the profit or loss prospects from doing nothing, including foregoing crop insurance, to hedging covered bushels with futures and options.

Crop insurance

Revenue Protection covering 75% appears likely to be the best seller again this year. But these plans aren’t free, and buying up coverage to 85% is even more expensive. Growers in 2022 paid an average of $23.50 an acre for 75% RP corn, with premiums for 85% averaging $43.68, before pandemic subsidies, and the bill should be similar this year.

Average soybean premiums should be a little lower for 2023 due to lower volatility factors and spring price guarantees. Last year 75% RP for soybeans averaged $13.67, with 85% running $28.67.

While average yields of 177 corn and 52.4 soybeans are still profitable at current prices, doing nothing and potentially waiting until harvest to sell risks losses if yields or prices fall only modestly. Not buying RP and using only catastrophic coverage nets more as long as worst-case scenarios don’t arise. But losses compared to using insurance skyrocket as prices fall or yields stumble.

Corn results

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Soybean results

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Hedging with futures/HTAs

Pricing new crop at current prices up to the limits of RP protection removes downside risk if the markets break, but could trigger losses if yields fall and prices rise – which typically happens in short crop rally years.

Buying insurance and hedging only 75% of expected yields, instead of 85%, saves around $20 an acre for corn and $14 for soybeans. But as prices fall or yield losses top 15%, the extra protection from an 85% hedging and insurance strategy looks better. So for hedgers, the question may be how much risk they – and their bankers – are comfortable taking.

Corn results

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Soybean results

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Options vs. futures

Buying put options instead of selling futures or HTAs has a major advantage: It keeps much of the upside from rallies open, unlike a hedge. If the market rallies enough, gains from a rally can offset losses on the put, which lose value as the market rises.

Alas, options are often called price insurance. And just like RP, puts aren’t free. An December 2023 put guaranteeing the right but not the obligation to sell futures for $5.70 last week cost 43.25 cents a bushel. An at-the-money soybean put sold for 70.25 cents. That expense is worth it – if the market rallies north of $6 again, enough to pay for the option.

Corn results

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Soybean results

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Three-legged race

One way to lower the cost of a put is by selling other options to help finance the purchase. For corn, selling a $7 call above the market and a $5 put below lowers the net cost of a $5.70 to 14 cents. For Soybeans, selling a $12 put at 16.125 cents and a $15 call for 32.75 trims the bill for a $13.70 put to 21 cents.

But this type of trade is not without risk either. Selling puts caps downside profits from the long put if prices fall below short option strike price. And selling out-of-the-money calls does the same with upside potential. So, the three-legged option strategy does better that the long put only strategy if prices don’t make extreme moves.

Corn results

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Soybean results

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Knorr writes from Chicago, Ill. Email him at [email protected].

The opinions of the author are not necessarily those of Farm Futures or Farm Progress.