Grain and oilseed prices have continued to rise since January 2021, with the December 2021 corn futures price reaching $6.36/bu. in May 2021 (up $2.06/bu. from January 2021), and November 2021 soybean futures prices reaching $14.60/bu. in June 2021 (up $3.48/bu. from January 2021). Currently prices remain near the highest in seven years and if prices continue to follow the pattern similar to 2012, the 2021 December corn futures could reach as high as $7.75/bu. by end of August 2021 and November soybeans could see $17.00/bu. The December 2012 futures prices hit a high of $8.39/bu. in August 2012 after increasing $2.89/bu from May 2012. November 2012 soybeans gained $4.73 during that same time period.
Comparison to 2012 Drought
How does this year compare with the 2012 drought? In 2012, many producers did not market a large percentage of their corn and soybeans at the top price levels. Producers had started pre-harvest marketing their crops during the spring and early summer, before the onset of the drought, at prices that seemed good at the time. Once the drought set in, producers needed to be cautious about how much more grain they pre-harvest marketed with forward contracts that required delivery, in case they did not produce adequate crop bushels to meet the required contracts. This led many producers to miss the top of the market. However, for most Wisconsin corn and soybean producers, the strong grain prices, coupled with crop insurance payments, resulted in a very profitable year for crop production in 2012.
Pre-Harvest Marketing Options
The March 15 deadline for crop insurance has long passed. Producers who purchased crop revenue protection insurance for 2021 can feel slightly at ease in entering pre-harvest marketing contracts up to the amount of their elected crop insurance. If producers don’t have the adequate number of bushels to fulfill the pre-harvest market contract at harvest, the crop revenue insurance indemnity will pay enough to source the needed bushels to fulfill the contracts. Forward contracting more bushels than a producer has insured is a risky activity, especially during drought years.
Unfortunately, Wisconsin has a low percentage of corn and soybean acres covered with crop insurance. Wisconsin had only 78% of corn acres insured in 2020, compared with 99%, 97%, and 96% in Minnesota, Iowa and Illinois, respectively. Comparatively, Wisconsin had only 79% of soybean acres covered by crop insurance in 2020, compared with 97%, 96%, 93% in Minnesota, Iowa and Illinois, respectively. What marketing strategies do these producers with uninsured acres have for grain marketing?
It is important to remember that corn prices may trade higher but the current commodity prices are already very attractive. If no forward contracts have been entered, producers should seriously consider different contract options. Producers should consult their crop insurance agents or revisit their crop insurance statements. It is recommended that up to 50% of expected crop production could be contracted. If producers are considering forward contracting, start small and consider contracting 10-25% of your anticipated production. The exact percentage should be based on what level of drought a producer is currently experiencing and the current growing conditions of their crops. As weather incidents occur throughout the summer, a producer may consider booking an additional 15-25% when prices increase. For those with acres in severe drought regions and with no crop revenue protection insurance purchased, a smaller percentage of production could still be forward contracted, but error on the conservative side to be sure adequate bushels to fulfill the contract at harvest. Further price risk protection could be achieved through other pre-harvest marketing, such as options contracts.
Options Contracts
Put options can be bought and used to set a price floor. A producer’s price floor will be equal to the purchased put strike price plus the anticipated harvest basis minus the put premium and any brokerage fees. For example, December 2021 futures are currently trading at $5.36/bu. and a $5.10 put costs $0.35/bu. If a producer assumes the harvest basis will be $0.50/bu under the December 2021 contract price and brokerage fees are $0.01/bu., then the hedged price would be $5.10 minus $0.35 minus $0.50 minus $0.01, for a final hedge price of $4.24/bu. The final price will be higher if the December 2021 futures price decreases below $5.10 or if basis strengthens. Neither scenario is likely during a harvest time drought.
For those producers that regret having pulled the trigger a bit early and forward contracted in early spring, buying call options for the number of bushels they have forward contracted can help to increase the price, should prices continue to rally. In this case, the producer’s price floor will be the forward contract price minus the call premium minus any brokerage fees. A producer should only consider this option if they believe the futures price will increase above the call strike price by more than the call premium plus brokerage fees.
For example, assume a producer forward contracted early this spring at $4.40/bu., currently December 2021 futures are at $5.36/bu. and a $5.70 call can be purchased for $0.35/bu. Assume a brokerage fee of $0.01/bu. The price floor is $4.40 minus $0.35 minus $0.01, which is $4.04; however, if futures prices continue to rally and go above $5.70/bu. the premium for the $5.70 call will increase. If prices go as high as $6.50 by the end of September, the premium for the $5.70 will increase to approximately $0.75, which the producer will receive when they sell the $5.70 call thereby increasing the forward contracted price floor by $0.75 to $4.79/bu. Note that the increase in the hedged price is dependent on how much the futures price goes over the strike price. The hedged price isn’t as high as if the producer had not forward contracted, but then again, if they hadn’t forward contracted the producer would have had no price protection if prices decrease.
Options provide some opportunities for those producers that do not want to enter into contracts that require delivery of the commodity at harvest. However, options can be expensive during price volatility. If a producer is unfamiliar with the options markets, I suggest working with a broker the first time.
