With December corn and November bean prices plummeting over the last few weeks, it’s made for some tense times for U.S. agricultural producers. Given how challenging the last five years have been — especially 2019 — most every producer I know was looking forward to 2020 being a great year.
As we all know, the first four months of the year have been far from great, so I guess we can all agree things should get better as we go through the remainder of 2020. While there are obvious challenges and concerns with regards to profitability as planters are rolling in earnest this spring, there are also opportunities.
A producer who is trying to decide whether to make a sale at these levels must think about the potential ramifications. Most producers I know can come closer to making money or breaking even at $8.50 Nov beans than $3.35 Dec corn. Therefore, the decision to sell corn for this fall is much more complicated.
If a producer sells corn now, for most situations I’ve observed, the only way to count on profit is if the producer is counting on outside help through PLC or crop insurance. If the producer hedged corn now and the price of corn continued lower, they could potentially reap big rewards from multiple sources, making a $3.35CZ sale look good. However, in the event the corn market rallies back towards the spring price, if the producer hasn’t properly managed the risk of that sort of move, a sale at these prices would be tough to stomach. If a producer doesn’t raise the crop they budgeted for and has sales locked in below the market, given the financial challenges of the last few years, such a situation could wreck a farm.
What options do we have to manage risk in this situation? Most understand how to place a floor under prices or how to put true hedges in place. However, given these interesting times, a different sort of risk-management can be employed.
Looking at December corn, we started the month of May trading around $3.35, which is just above 86% of the spring insurance price of $3.88. November beans, on the other hand, are starting the month around $8.53, which is 93% of the spring insurance price of $9.17.
For beans, I don’t see near the incentive or opportunities to ‘protect’ a potential insurance claim.
However, for corn it’s a different story. For producers who have 85% revenue protection or bought up their insurance to 90 or 95%, it might make sense to get a long strategy established considering where prices currently reside in relationship to those levels of protection. For 90% revenue protection, the ‘floor’ for producers is $3.50 at insured bushels while $3.30 is 85% of $3.88. It’s important to highlight your ‘floor’ will be adjusted depending on the actual yield next fall. For instance, a producer with a crop revenue coverage will see the ‘floor’ lowered if the producer has a better yield than their APH.
Given all this, do I want to make sales and potentially ‘protect’ against the price going up? Personally, I see no reason to make sales at levels this low unless the producer has no sales yet and is certain to need money in the fall. If this is the case and you choose to make sales, it would be wise to consider managing as many aspects of your risk as possible.