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Make sure you can weather whatever USDA and Mother Nature throw at the market.

Bryce Knorr, Contributing market analyst

June 29, 2021

8 Min Read
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Like a prize fighter bloodied and back on his heels, grain markets are ending June hoping for a haymaker to stave off defeat. But before going down for the count or tossing in the towel, growers should reassess their 2021 marketing plans.

To be sure, futures got walloped last week by a nasty one-two punch: The U.S. Supreme Court compounded forecasts for drought-busting rains in parts of the Midwest by backing biofuel waivers for troubled oil refineries who say they can’t afford to meet blending obligations under Renewable Fuels Standard mandates.

Still, even losing fighters collect a paycheck, and even faltering current prices offer hopes for a profit -- in some case a big one -- for growers who don’t want to roll the dice on bullish news out of June 30 USDA reports.

Corn sales are still very profitable for the average producer, even if yields slip. Soybean margins are thinner, but offer a chance at beating break-evens unless prices or yields really suffer.

Best hopes for rally

While the environment for the markets was very bearish last week, that negativity may be the best hope for at least a relief rally following Wednesday’s quarterly Gain Stocks and Acreage updates.  And there’s always a chance that even seemingly beneficial weather for crops isn’t helping alleviate stress as much as believed, or that excessive rains caused significant damage.

The report on June 1 corn and soybean inventories may be the most difficult for many traders to unpack. Those who solely focus on headline numbers could overreact to estimates that are murky at best.

In theory, the stocks data reveals how much grain was left over at the start of the summer quarter, the final one for the 2020-2021 crop marketing year. But the estimates for March-May usage always contain some statistical noise that makes the reports all the harder to digest. The likely possibility that many traders don’t understand the reports only increases potential for volatility.

The average guess from analysts covering these markets puts June 1 corn stocks at 4.13 billion bushels, in a range from 3.917 to 4.65 billion. My own spreadsheet puts the inventory at 4.011 billion, and I’ll be the first to confess it’s as much guess as math.

We know how much corn was around at the start of the quarter on March 1, though that was only an estimate too. Exports and usage to make ethanol are reported weekly, so it’s possible to make good projections on these as well as imports.

The unknown category is a big one: demand for feed. This is impossible to measure directly, as the amount of usage implied by the change in stocks from March 1 to June 1 that was not exported, used for seed, or attributed to industrial uses like ethanol, is assumed to have been fed to livestock. But this category also includes a factor for “residual usage,” which the government uses to account for errors in previous reports.

So, if the June 1 stocks are different from expectations, we won’t know if it’s due to livestock feeding, statistical noise, or perhaps a clue that 2020 production was different than USDA’s last estimate in January.

Again, some traders may not recognize these subtilties, especially those using automated high frequency trading systems run by computers that make pre-programmed trades based on headline numbers.

A larger than expected reading may indicate that price rationing succeeding in dampening livestock demand, while a smaller total could trigger hopes for higher prices to keep the market from running out of corn before the 2021 harvest refills the pipeline.

For soybeans even small changes in the quarterly data from expectations could produce significant price adjustments, because most of the demand from exports, crush and seed usage is fairly well known. But soybean residual demand in some quarters turns out to be a negative number, correcting overestimates from previous reports. The size of this negative residual factor is difficult, if not impossible to forecast ahead of the report’s release. While those following the data carefully merely scratch their heads, others will follow an itchy trigger finger.

For the record, I put June 1 soybean inventories at 829 million bushels. That’s on the high side of analysts’ guesses, which average 777 million in a range from 691 to 838 million.

What about acreage estimates?

Acreage estimates will be more straight-forward to interpret, though even these updates to planting intentions numbers from the end of March also contain some fuzziness. While most of the corn crop is planted, some soybean fields were still bare when USDA surveyed growers in the first two weeks of June for their estimates. And second crop beans planted behind winter wheat could be a swing factor too.

USDA’s March 31 low estimates – 91.1 million acres of corn and 87.6 million soybeans -- shocked the market, helping trigger huge rallies. But history suggests conditions for swift planting and record profit potential likely convinced growers to increase seedings substantially.

My models point to corn acres of 93.9 million, close to the average analysts’ guess of 93.8 million, in a range from 92 to 95.8 million. Soybeans could increase to 90 million, higher than the average trade guess of 89.1 million, which ranged from 88 to 90.6 million.

The market also will watch for clues about yields after recent rains. Last week’s Crop Progress ratings and Vegetation Health Index readings declined, so better condition reports will be crucial to maintaining production, even with a big increase in acreage for both crops.

For growers still holding and hoping on unpriced new crop production, taking a look at your bottom line could be more important than trying to outguess USDA and the market.

The view looks very favorable for corn.

Table 1 shows the array of profit or loss outcomes of a “wait and see” strategy, based on different yields and December futures prices at harvest. The yellow line shows results from yields meeting the current 20-year trend year, a baseline for normal production. As long as prices stay above $3.50 corn looks profitable regardless of yield, assuming average costs, participation in the ARC farm program and 80% revenue protection crop insurance. So, if your business can afford it, doing nothing may not be unreasonable.

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But before waiting to pull the trigger, take a look at Table 2, which shows results from sales made at Friday’s $5.1925 close covering 80% of expected production with futures or hedge-to arrive contracts. With average costs and basis trends, triple-digit profits seem pretty much assured. If that’s good enough, perhaps a “take the money and run” strategy may not be so bad.

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Selling locks in a price, of course, missing out if futures rise afterward. One alternative is to cover sales with call options that could gain in value on rallies. Call options aren’t cheap, and if the market doesn’t rise, all the premium paid upfront could be lost. Table 3 shows what happens if the 80% sale is covered with an out-of-the-money $6 call. The 24-cent premium is a drag on profits until futures rise to $6.25, the $6 strike price plus the cost of the option.

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Selling an out-of-the-money call with a strike price above the long call purchased improves profit potential but the short option caps gains if the market really explodes. Table 4 shows these outcomes.

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The short futures/cash position covered with a call option is known as a synthetic put. The strategies outlined in tables 3 and 4 amount to in-the-money synthetic puts. Table 5 shows results from a straight purchase of a $5.20 put. At-the-money options have a delta of .5 initially, which means they capture half of the move of their underlying futures contracts. In-the-money positions, such as those shown in Tables 3 and 4, have a delta above .5, so they do better in falling markets, while the at-the-money put performs better in a rising market.

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The profit outlook for soybeans shows potential for both profit and losses. Table 1 for beans has plenty of red ink if prices and yields falter. Both ARC and RP offset some of the downside when revenues disappoint, but neither provide 100% protection.

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Taking action eases some of the downside. Table 2 shows results from pricing 80% at Friday’s $12.6975 close with futures or hedge-to-arrive contracts. Breaking even seems likely unless yields are cut by 15% or more and/or futures rally sharply. Certainly the outlook for black in was more impressive before November futures lost $2 a bushel.

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Using soybean options is more challenging in this environment of thinner margins because the cost of puts and calls eats into profits. Combining options positions to lower this expense also increases risk depending on the net delta of the position. Tables 3, 4 and 5 provide examples of these outcomes.

There are an endless ways to mix and match options and futures, covering various levels of protection to meet the specific needs of your operation. Know the risks and rewards, whatever you decide to do.

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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. 

About the Author(s)

Bryce Knorr

Contributing market analyst, Farm Futures

Bryce Knorr first joined Farm Futures Magazine in 1987. In addition to analyzing and writing about the commodity markets, he is a former futures introducing broker and Commodity Trading Advisor. A journalist with more than 45 years of experience, he received the Master Writers Award from the American Agricultural Editors Association.

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