Still Large Amount Of Uncertainty Regarding Commodity Prices
DR. AARON SMITH
KNOXVILLE, TENNESSEE
Markets are trying to find where values should be. There continues to be a large amount of uncertainty regarding commodity prices, due to the Ukraine-Russia conflict and political responses by external nations. Futures markets have been very volatile, and are likely to continue to be volatile, as traders try to determine value between commodities and across time. Relative values and values at different points in time are influenced by many factors simultaneously.
Futures markets provide price discovery for commodities. The process involves determining value between commodities (for example soybean-to- corn price ratio) and commodity value over time (for example wheat value by contract month). The challenge for traders is digesting new information and determining short run and long run implications for commodities and the global economy. Information is translated into a price expectation and entered into the marketplace. Because there is so much uncertainty the “educated guesses” as to the outcomes of information very tremendously and consequently there is a wide range of potential outcomes. This drives price volatility as competing price expectations are expressed in futures markets.
Many producers facing extreme volatility may choose to take a wait and see approach until markets stabilize, and that may be the correct strategy based on their current sales and the risk management program for the farm. Crop insurance provides an excellent starting point to build a price risk management plan. However, volatility does provide opportunity and can be used to strengthen an existing risk management plan. For example, as at March 11, July wheat was trading at $10.77 ($3.63 above the fall crop insurance price of $7.14). A $10.80 July put option can be purchased for $1.29 establishing a $9.51 futures price floor. This strategy provides downside protection while leaving the upside open. It is worth considering if this type of strategy is right for your operation. Option premiums are expensive, but when the wheat crop was planted last fall would you have taken $9.51 futures floor? That should result in very profitable outcomes for most producers.
Corn
Ethanol production for the week ending March 4 was 1.028 million barrels per day, up 31,000 from the previous week. Ethanol stocks were 25.271 million barrels, up 0.338 million compared to last week. Corn net sales reported by exporters for February 25-March 3, 2022, were up compared to last week with net sales of 84.4 million bushels for the 2021/22 marketing year – a marketing year high – and 0.9 million bushels for the 2022/23 marketing year. Exports for the same period were up 14 percent from last week at 69.4 million bushels. Corn export sales and commitments were 79 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 78 percent. Across Tennessee, average corn basis (cash price-nearby futures price) strengthened at Mississippi River elevators and barge points and weakened at West, Northwest, West-Central, and North-Central elevators and barge points. Overall, basis for the week ranged from 20 under to 25 over, with an average of 1 under the May futures at elevators and barge points. May 2022 corn futures closed at $7.62, up 8 cents since last Friday. For the week, May 2022 corn futures traded between $7.28 and $7.80. May/Jul and May/Dec future spreads were -34 and -107 cents. July 2022 corn futures closed at $7.28, up 7 cents since last Friday.
New crop cash prices at elevators and barge points ranged from $6.01 to $6.77. December 2022 corn futures closed at $6.55, up 26 cents since last Friday. Downside price protection could be obtained by purchasing a $6.60 December 2022 Put Option costing 75 cents establishing a $5.85 futures floor.
Soybeans
Net sales reported by exporters were up compared to last week with net sales of 81.0 million bushels for the 2021/22 marketing year and 32.9 million bushes for the 2022/23 marketing year. Exports for the same period were up 11 percent compared to last week at 30.7 million bushels. Soybean export sales and commitments were 92 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 88 percent. Across Tennessee, average soybean basis weakened or remained unchanged at West, Northwest, West-Central, North-Central, Mississippi River elevators and barge points. Basis ranged from 22 under to 34 over, with an average basis of 9 over the May futures contract. May 2022 soybean futures closed at $16.76, up 16 cents since last Friday. For the week, May 2022 soybean futures traded be-tween $16.49 and $17.34. May/Jul and May/Nov future spreads were -25 and -185 cents. May 2022 soybean-to-corn price ratio was 2.20 at the end of the week. July 2022 soybean futures closed at $16.51, up 18 cents since last Friday.
Nov/Dec 2022 soybean-to-corn price ratio was 2.28 at the end of the week. New crop cash soybean prices at elevators and barge points ranged from $14.26 to $15.22. November 2022 soybean futures closed at $14.91, up 41 cents since last Friday. Downside price protection could be achieved by purchasing a $15.00 November 2022 Put Option which would cost 129 cents and set a $13.71 futures floor.
Cotton
Net sales reported by exporters were up compared to last week with net sales of 416,800 bales for the 2021/22 marketing year and 68,200 bales for the 2022/23 marketing year. Exports for the same period were down 9 percent compared to last week at 321,300 bales. Upland cotton export sales were 96 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 92 percent. Delta upland cotton spot price quotes for March 10 were 117.86 cents/lb (41-4-34) and 120.11 cents/lb (31-3-35). Adjusted world price decreased 1 cent to 111.71 cents. May 2022 cotton futures closed at 121.03 cents, up 4.61 cents since last Friday. For the week, May 2022 cotton futures traded between 115.37 and 121.73 cents. May/Jul and May/Dec cotton futures spreads were -4.24 cents and -16.79 cents. July 2022 cotton futures closed at 116.79 cents, up 3.68 cents since last Friday.
December 2022 cotton futures closed at 104.24 cents, up 3.59 cents since last Friday. Downside price protection could be obtained by purchasing a 105 cent December 2022 Put Option costing 11.85 cents establishing a 93.15 cent futures floor.
Wheat
Wheat net sales reported by exporters were down compared to last week with net sales of 13.0 million bushels for the 2021/22 marketing year and 2.3 million bushels for the 2022/23 marketing year. Exports for the same period were up 5 percent from last week at 14.1 million bushels. Wheat export sales were 86 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 96 percent. Wheat cash prices at elevators and barge points ranged from $9.37 to $11.44. May 2022 wheat futures closed at $11.06, down 103 cents since last Friday. May 2022 wheat futures traded between $10.43 and $13.63 this week. May wheat-to-corn price ratio was 1.45. May/Jul and May/Sep future spreads were -29 and -62 cents.
New crop wheat cash prices at elevators and barge points ranged from $8.70 to $11.52. July 2022 wheat futures closed at $10.77, down 98 cents since last Friday. Downside price protection could be obtained by purchasing a $10.80 July 2022 Put Option costing 129 cents establishing a $9.51 futures floor. September 2022 wheat futures closed at $10.44, down 19 cents since last Friday. ∆
DR. AARON SMITH: Assistant Professor, Crop Marketing Specialist, University of Tennessee