The market still faces plenty of uncertainty over just how tight supplies of corn and soybeans will be at the end of the 2021 marketing years on Aug. 31. South American weather and Chinese demand remain huge question marks for old crop stocks.
But with USDA’s big January reports in the record books, look for traders to increasingly focus on what will happen with 2022 crop production as growers try to finalize planting choices for spring.
Those decisions should include marketing plans for the year ahead. While considering price targets and cash flow needs, also map out what selling strategies suit your operation’s risk management tolerances.
Past performance is no indication of future success, as the fine print in your brokerage statement says. But a look back at history provides clues for new crop hedgers about what tools and timing work -- and why.
Corn and soybean futures normally move hand-in-hand, and that certainly was the case during the bull market of 2020-2021. December corn and November futures for harvest 2021 delivery reflected 94% of the movement between the two contracts from spring 2020 to harvest 2021.
Still, after the first part of 2021 this close-knit relationship cooled some, dropping to 80%. That may not seem like much. But the difference turned out huge for farmers following pre-harvest seasonal selling patterns for new crop hedges. While using the calendar for soybeans beat the harvest price by a buck or more for some strategies, those same techniques failed for corn, resulting in a net cash price below that achieved by simply selling out of the field.
These pre-harvest hedging results were some of the key findings from the latest update to Farm Futures long-term study of new crop selling strategies. The research uses futures and options quotes and cash prices from 11 corn and nine soybean markets from 1985 through the 2021 harvest. Three selling windows are considered: mid-April and mid-May for both crops, with a third sale in late June for corn and mid-July for soybeans.
In addition to straight sales using futures or hedge-to-arrive contracts, price averages from January and March through August are compared. Put options, which convey the right but not the obligation to sell futures are also included, along with what’s known as a synthetic put. That position combines a futures/HTA sale with the purchase of a call option bought beforehand during periods of seasonal weakness at the end of February, April and May. Three different calls are considered – at-the-money and one and two strikes out-of-the-money.
While results are hypothetical and not from actual trades, they provide a glimpse of how strategies perform, and why.
Here’s what we learned.
A few days difference
Volatile markets that peaked and fell quickly were one reason for the disparity in results. Days that worked for soybeans also didn’t for corn, in part because the rally tops didn’t match. Corn futures peaked five days before soybeans on the May surge, for one. And while corn’s June rebound fell short of its high from the prior month, soybeans set a new contract high in June and held up much better in July.
That support for beans didn’t last. November futures continued to make new lows into delivery, while December bottomed in September, before firming, helping those who sold across the scales instead of hedging.
Risk equals reward
The biggest winner for 2021 sellers came from using soybean futures or HTAs, which added $1.28 a bushel returns to the harvest cash price. That’s in line with long-term averages, which show these tools netting the most of any of the strategies. Soybean hedges beat the harvest price two-thirds of the time, enough to be statistically significant and not the mere result of chance.
But with greater returns comes greater risk, especially for corn hedgers. Selling futures/HTAs on average is also the best strategy for corn long-term, beating the harvest price 70% of the time in the study. But when corn hedges go bad, they really go bad. Unprotected hedgers earned an average of $343 an acre less than harvest revenues in 2012. Early hedges lost big and growers also had less corn to sell at harvest, multiplying the red ink.
Average isn’t average
Average price contracts are billed as one way to avoid that type of risk. Our study showed both the promise and pitfalls of this method. Taking the average futures price from March 1 to Sept. 1 is the second most profitable strategy for both corn and soybeans, capturing 75% of futures gains in soybeans and 82% for corn.
But both average price tools also lost big in 2012. In fact, the Jan. 1 to Sept. 1 window lost even more money per acre than straight hedging for corn on average.
Options are one way to try to control that risk, but the protection comes at a price, premiums that must be paid up front. Even when the options finish in the money this cost must be deducted from profits. For 2021 crops, options strategies were the worst performers, reflecting the long-term trends in our study.
For soybeans, that meant options made less than futures or HTAs, and they also netted less of the futures gain than predicted by market theory. Corn options strategies lost more than the other methods, and they suffered from more than bad timing.
Implied volatility, a measure of market uncertainty that affects the relative cost of options, stood at 24% on the trading dates in the study for soybeans. But for December corn volatility averaged nearly 35%. This made corn options significantly more expensive to use as a percent of the futures price, acting as an anchor on their results.
For complete results of the study, see the links below:
Knorr writes from Chicago, Ill. Email him at firstname.lastname@example.org
The opinions of the author are not necessarily those of Farm Futures or Farm Progress.