Holding Grain Or Cotton In Storage Without Price Protection Is Risky

DR. AARON SMITH

KNOXVILLE, TENNESSEE

Storage is a beneficial marketing tool for Tennessee producers. However, holding grain or cotton in storage without price protection is risky, particularly in periods of higher interest rates. Elevated storage costs

and the potential for a futures market price decline can amplify losses very quickly. To mitigate some of the futures price risk producers may want to consider using options for unpriced crops held in storage. There are numerous option strategies that can be implemented. Careful consideration needs to be afforded to strike prices, premiums, and risk. An option fence can be used to establish a futures market price floor and offset some of the premium expense, at the cost of upside futures market price potential. 

 For example, a producer holding corn in storage could purchase a $4.50 March corn put option for 7 1⁄4 cents (premiums as of September 15th) and sell a $6.20 March corn call option for 2 cents. The net premium cost is 5 1⁄4 cents (7 1⁄4 - 2 cents) plus trans- action costs. A futures market price floor has been established at $4.50 (by purchasing the put). The tradeoff is sacrificing futures market price gains above $6.20 (by selling the call). As such, the futures market price is “fenced” in between $4.00 and $6.20. This strategy also allows for the basis to be fixed at a later time. Typically, corn basis strengthens after harvest in Tennessee. The decision to execute this strategy will depend on the producer’s price expectation for the March corn futures contract. 

Looking at the March cotton contract, a similar strategy could be implemented. Buy an 80-cent March put option for 1.80 cents and sell a 100-cent March call for 1.47 cents. The net premium cost is 0.33 cents, and the futures market price has been fenced between 80 and 100 cents. Removing downside risk can help avoid substantial losses for crops held in storage.

This is an example of how options can be used to mitigate futures market price risk while offsetting a portion of the premium cost. This is not a trading recommendation and is presented for informational and educational purposes only. Working with a qualified broker is strongly encouraged for those producers that are new to futures and options trading. 

Corn 

Ethanol production for the week ending September 8 was 1.039 million barrels per day, up 27,000 barrels from the previous week. Ethanol stocks were 21.171 million barrels, down 450,000 barrels compared to last week. Corn net sales reported by exporters for September 1-7 were net sales of 29.7 million bushels for the 2023/24 marketing year and 1.0 million bushels for the 2024/25 marketing year. Exports for the same period were up 41% compared to last week at 28.6 million bushels. Corn export sales and commitments were 21% of the USDA estimated total annual exports for the 2023/24 marketing year (September 1 to August 31) compared to the previous 5-year average of 31%. Across Tennessee, average corn basis (cash price- nearby futures price) strengthened or remained unchanged at West, Northwest, North-Central, and West-Central elevators and barge points and weakened at Mississippi River elevators and barge points. Overall, basis for the week ranged from 34 to 10 under, with an average of 22 under the December futures at elevators and barge points. 

The Crop Progress report estimated corn condition at 52% good-to-excellent and 18% poor-to-very poor; corn dough at 97% compared to 93% last week, 95% last year, and a 5-year average of 96%; corn dented at 82% compared to 67% last week, 75% last year, and a 5-year average of 78%; corn mature at 34% compared to 18% last week, 24% last year, and a 5-year average of 28%; and corn harvested at 5% compared to 5% last year and a 5-year average of 4%. In Tennessee, corn condition was estimated at 75% good-to-excellent and 8% poor-to-very poor; corn dough at 99% compared to 98% last week, 100% last year, and a 5-year average of 100%; corn dented at 96% compared to 91% last week, 93% last year, and a 5-year average of 94%; corn mature at 64% compared to 45% last week, 56% last year, and a 5-year average of 61%; and corn harvested at 12% compared to 5% last week, 13% last year, and a 5-year average of 16%. New crop cash prices ranged from $4.11 to $4.74 at elevators and barge points. December 2023 corn futures closed at $4.76, down 7 cents since last Friday. For the week December 2023 corn futures traded between $4.73 and $4.86. Dec/Mar and Dec/May future spreads were 14 and 23 cents. Downside price protection could be obtained by purchasing a $4.80 December 2023 Put Option costing 18 cents establishing a $4.62 futures floor. March 2024 corn futures closed at $4.90, down 8 cents since last Friday. May 2024 corn futures closed at $4.99, down 7 cents since last Friday. 

Soybeans 

Across Tennessee average soybean basis strengthened or remained unchanged at Northwest, North-Central, West-Central, and West elevators and barge points and weakened at Mississippi River elevators and barge points. Basis ranged from 33 to 10 under the November futures contract, with an average basis at the end of the week of 22 under. Soybean net weekly sales reported by exporters were net sales of 25.9 million bushels for the 2023/24 marketing year. Exports for the same period were down 21% compared to last week at 15.0 million bushels. Soybean export sales and commitments were 34% of the USDA estimated total annual exports for the 2023/24 marketing year (September 1 to August 31), compared to the previous 5-year average of 41%. 

The Crop Progress report estimated soybean condition at 52% good-to-excellent and 18% poor-to-very poor; and soybeans dropping leaves at 31% compared to 16% last week, 20% last year, and a 5-year average of 25%. In Tennessee, the Crop Progress report estimated soybean condition at 78% good-to-excellent and 7% poor-to-very poor; soybeans setting pods at 96% compared to 92% last week, 98% last year, and a 5-year average of 98%; soybeans dropping leaves at 28% compared to 18% last week, 28% last year, and a 5-year average of 25%; and soybeans harvested at 2% compared to 0% last week, 2% last year, and a 5-year average of 2%. November 2023 soybean futures closed at $13.40, down 23 cents since last Friday. For the week, November 2023 soybean futures traded between $13.33 and $13.73. New crop cash soybean prices at elevators and barge points ranged from $12.78 to $13.59. Downside price protection could be achieved by purchasing a $13.50 November 2023 Put Option which would cost 33 cents and set a $13.17 futures floor. Nov/Dec 2023 soybean-to-corn price ratio was 2.82 at the end of the week. Nov/Jan and Nov/Mar future spreads were 15 and 25 cents. March soybean-to-corn price ratio was 2.79 at the end of the week. January 2024 soybean futures closed at $13.55, down 23 cents since last Friday. March 2024 soybean futures closed at $13.65, down 19 cents since last Friday. 

Cotton 

North Delta upland cotton spot price quotes for September 14 were 84.22 cents/lb (41-4-34) and 86.47 cents/lb (31-3-35). Adjusted world price (AWP) was down 1.6 cents at 71.95 cents. Cotton net weekly sales reported by exporters were 67,400 bales for the 2023/24 marketing year and 25,300 for the 2024/25 marketing year. Exports for the same period were down 33% com- pared to last week at 118,200 bales. Upland

cotton export sales were 46% of the USDA estimated total annual exports for the 2023/24 marketing year (August 1 to July 31), compared to the previous 5-year average of 58%. 

The Crop Progress report estimated cotton condition at 29% good-to-excellent and 41% poor-to-very poor; cotton setting bolls at 98% compared to 94% last week, 100% last year, and a 5-year average of 98%; cotton bolls opening at 43% compared to 32% last week, 48% last year, and a 5-year average of 42%; and cotton harvested at 8% compared to 8% last year and a 5-year average of 7%. In Tennessee, the Crop Progress report estimated cotton condition at 73% good-to-excellent and 11% poor-to-very poor; cotton setting bolls at 100% compared to 99% last week, 100% last year, and a 5-year average of 100%; cotton bolls opening at 30% compared to 18% last week, 29% last year, and a 5-year average of 33%; and cotton harvested at 1%. December 2023 cotton futures closed at 86.44 cents, up 0.53 cents since last Friday. For the week, December 2023 cotton futures tradedbetween 86.36 and 88.61 cents. Downside price protection could be obtained by purchasing an 87 cent December 2023 Put Option costing 2.62 cents establishing an 84.38 cent futures floor. March 2024 cotton futures closed at 87.36 cents, up 1.27 cents since last Friday. May 2023 cotton futures closed at 87.84 cents, up 1.56 cents since last Friday. Dec/Mar and Dec/May cotton futures spreads were 0.92 cents and 1.4 cents. 

Wheat 

Wheat net weekly sales reported by exporters were net sales of 16.1 million bushels for the 2023/24 marketing year. Exports for the same period were up 30% compared to last week at 15.1 million bushels. Wheat export sales were 44% of the USDA estimated total annual exports for the 2023/24 marketing year (June 1 to May 31), compared to the previous 5-year average of 50%. Wheat cash prices at elevators and barge points ranged from $4.56 to $5.19. 

The Crop Progress report estimated winter wheat planted at 7% compared to 1% last week, 9% last year, and a 5-year average of 7%; and spring wheat harvested at 87% compared to 74% last week, 83% last year, and a 5-year average of 87%. December 2023 wheat futures closed at $6.04, up 9 cents since last Friday. December 2023 wheat futures traded between $5.70 and $6.07 this week. December wheat-to-corn price ratio was 1.27. Dec/Mar and Dec/Jul future spreads were 25 and 48 cents. March 2024 wheat futures closed at $6.29, up 8 cents since last Friday. July 2024 wheat futures closed at $6.52, up 5 cents since last Friday. Downside price protection could be obtained by purchasing a $6.60 July 2024 Put Option costing 64 cents establishing a $5.96 futures floor. New crop wheat cash prices at elevators and barge points ranged from $5.66 to $6.22.  ∆

DR. AARON SMITH: University of Tennessee