Many Producers Use Crop Insurance As Base For Their Risk Management Program
DR. AARON SMITH
KNOXVILLE, TENNESSEE
There is more risk this year, than typical years, for producers between now and when projected (spring) crop insurance prices are set. Many producers use crop insurance as the base for their risk management program. However, a concern for producers is the approximately three months between now and the end of the crop insurance price determination period (February 28 in Tennessee), during which producers will have no price protection unless they use market-based risk management strategies. Commodity prices have been strong but are showing signs of weakness or at the very least hesitancy before any potential upward move. Additionally, input prices have doubled or tripled compared to last year. Producers that are purchasing inputs before the year end, without pricing or setting a price floor on some of their anticipated 2022 production, have a tremendous amount of financial risk. As such, producers may want to consider mitigating some of the financial risk by establishing a price or price floor for some 2022 production.
If producers are uncomfortable with finalized sales (such as forward contracts), they may want to consider using a simple risk management strategy to bridge the risk, until crop insurance protection is set.
This can be accomplished through numerous marketing and risk management strategies. A simple illustration of this is using out-of- the-money put options to secure a price floor. For example, an $11.60 November 2022 soybean put option can be purchased for 42 cents setting an $11.18 futures floor. This will provide producers with protection against unforeseen dramatic price declines. Carrying the put option out to mid-March will provide protection until crop insurance coverage is set and allow the producer to exit the option position and recoup part of the premium (should they choose to), as there is at least time value for the option position. This strategy is about risk mitigation, and if used, producers should hope the put is not in-the-money in mid- March (meaning prices are still above the floor price).
Corn
Ethanol production for the week ending December 3 was 1.090 million barrels per day, up 55,000 from the previous week. Ethanol stocks were 20.464 million barrels, up 0.163 million compared to last week. Corn net sales reported by exporters for November 26-December 2, 2021, were up compared to last week with net sales of 44.6 million bushels for the 2021/22 marketing year. Exports for the same period were down 4 percent from last week at 35.6 million bushels. Corn export sales and commitments were 58 percent of the USDA estimated total exports for the 2021/22 marketing year (September 1 to August 31) compared to the previous 5-year average of 50 percent. Across Tennessee, average corn basis (cash price-nearby futures price) weakened at West and Mississippi River elevators and barge points and strengthened or remained unchanged at Northwest, West-Central, and North-Central elevators and barge points. Overall, basis for the week ranged from 20 under to 30 over, with an average of 7 over the March futures at elevators and barge points. March 2022 corn futures closed at $5.90, up 6 cents since last Friday. For the week, March 2022 corn futures traded between $5.75 and $5.94.
Mar/May and Mar/Dec future spreads were 2 and -39 cents. May 2022 corn futures closed at $5.92, up 6 cents since last Friday. December 2022 corn futures closed at $5.51, down 1 cent since last Friday. Downside price protection could be obtained by purchasing a $5.60 December 2022 Put Option costing 58 cents establishing a $5.02 futures floor.
Soybeans
Net sales reported by exporters were up compared to last week with net sales of 60.2 million bushels for the 2021/22 marketing year. Exports for the same period were up 5 percent compared to last week at 89.4 million bushels. Soybean export sales and commitments were 70 percent of the USDA estimated total annual exports for the 2021/22 marketing year (September 1 to August 31), compared to the previous 5-year average of 69 percent. Across Tennessee, average soybean basis weakened or remained un-changed at West, West-Central, North-Central, and Mississippi River elevators and barge points and strengthened at Northwest elevators and barge points. Basis ranged from 23 under to 33 over, with an average basis of 5 over the January futures contract, at the end of the week. January 2022 soybean futures closed at $12.67, unchanged since last Friday. For the week, January 2022 soybean futures traded between $12.38 and $12.76. Jan/Mar and Jan/Nov future spreads were 7 and -19 cents. March 2022 soybean-to-corn price ratio was 2.16 at the end of the week. March 2022 soybean futures closed at $12.74, up 3 cents since last Friday.
Nov/Dec 2022 soybean-to-corn price ratio was 2.26 at the end of the week. November 2022 soybean futures closed at $12.48, up 14 cents since last Friday. Downside price protection could be achieved by purchasing a $12.60 November 2022 Put Option which would cost 89 cents and set an $11.71 futures floor.
Cotton
Net sales reported by exporters were down compared to last week with net sales of 382,600 bales for the 2021/22 marketing year and 18,100 bales for the 2022/23 marketing year. Exports for the same period were up 61 percent compared to last week at 114,800 bales. Upland cotton export sales were 66 percent of the USDA estimated total annual exports for the 2021/22 marketing year (August 1 to July 31), compared to the previous 5-year average of 68 percent. Delta upland cotton spot price quotes for December 9 were 106.34 cents/lb (41-4-34) and 108.59 cents/lb (31-3-35). Adjusted world price decreased 3.51 cents to 93.55 cents.
March 2022 cotton futures closed at 106.23 cents, up 2.03 cents since last Friday. For the week, March 2022 cotton futures traded between 105.31 and 107.35 cents. Mar/May and Mar/Dec cotton futures spreads were -1.3 cents and -16.48 cents. May 2022 cotton futures closed at 104.93 cents, up 2.02 cents since last Friday. December 2022 cotton futures closed at 89.75 cents, up 2 cents since last Friday. Downside price protection could be obtained by purchasing a 90 cent December 2022 Put Option costing 9.05 cents establishing a 80.95 cent futures floor.
Wheat
Wheat net sales reported by exporters were up compared to last week with net sales of 8.8 million bushels for the 2021/22 marketing year. Exports for the same period were down 43 percent from last week at 7.8 million bushels. Wheat export sales were 63 percent of the USDA estimated total annual exports for the 2021/22 marketing year (June 1 to May 31), compared to the previous 5-year average of 72%. March 2022 wheat futures closed at $7.85, down 20 cents since last Friday. March 2022 wheat futures traded between $7.68 and $8.13 this week. March wheat-to-corn price ratio was 1.33. Mar/May and Mar/Jul future spreads were 5 and -2 cents. May 2022 wheat futures closed at $7.90, down 19 cents since last Friday. May wheat-to-corn futures price ratio was 1.33.
New crop wheat cash prices at elevators and barge points ranged from $7.43 to $8.07. July 2022 wheat futures closed at $7.83, down 11 cents since last Friday. Downside price protection could be obtained by purchasing a $7.90 July 2022 Put Option costing 66 cents establishing a $7.24 futures floor. ∆
DR. AARON SMITH: Assistant Professor, Crop Marketing Specialist, University of Tennessee