The June U.S. Department of Agriculture’s World Agriculture Supply and Demand Estimate report was mostly neutral in its supply and demand fundamental information for the corn market. Most information came in as expected, with the USDA hesitant to make any changes to supply or demand for the 2023-24 crop year.
Regarding old crop fundamentals, the USDA increased ending stocks to 1.452 billion bushels, up from 1.417 billion bushels in May. This was due to less demand for U.S. corn exports. The increase in old crop ending stocks then was noted as higher carry-in for the 2023-24 data.
Interesting to note was the new crop 2023-24 season, where the USDA made no changes at all to yield or demand. Currently, the USDA has corn yield pegged at a record 181.5 bushels per acre. Likely, the USDA is waiting to see what Mother Nature has in store in the coming weeks before making any yield adjustments—despite 45% of the U.S. corn crop now in drought-like conditions and 39% of the U.S. soybean crop experiencing drought conditions as of this writing.
With little fresh fundamental news to offer market direction from this particular USDA report, traders went back to weather-watching, with the next round of news from the USDA not expected until the June 30 Planted Acres and Quarterly Stocks report.
Be ready for plenty of price volatility in the weeks ahead, as some traders may point to the dry start the U.S. corn crop has had and fear that a record corn yield is not possible. Bearish traders point out that corn hybrids have improved, and some rain coverage is better than no rain coverage. How will the markets respond? Assume the crop is record until proven otherwise? How does a farmer manage this?
An uncertain size corn crop growing in the fields is nerve-wracking for any producer. It is hard to market what you are unsure will grow. It makes forward contracting potentially uneasy, because if the corn crop doesn’t grow, you’re still on the hook to deliver corn to the elevator. How then does a producer protect new crop price value if it is deemed attractive?
One way to do that is to buy a put. Remember, if you’re buying a put, you’re protecting a price floor for your grain. And if the market should instead trade higher due to a drought, you are not dealing with margin calls, and you are able to take part in the rally with your cash sales. However, if the rains occur and corn prices fall lower, you’ll be thankful you have a price floor protected.
Also, consider price protection with a short-dated put. Short-dated options are gaining more relevance and importance as a tool you might employ to help shift risk or manage opportunity. As with any marketing tool, there are pros and cons that need to be measured. Let’s first explain what a short-dated option is and how it works.
The term “short-dated” refers to a shorter window before the option’s traditional last trading day, otherwise known as option expiration. You’re able to protect new crop December 2023 corn futures prices, yet with a shorter window of time.
For example, if you were to buy a traditional December 2023 corn put, it would expire on Nov. 24, 2023. With the short-dated options, you are still protecting December 2023 corn futures prices, but they cost less, because they expire much sooner than Nov. 24, 2023. Therefore, you’re paying less time value in the cost of the option premium itself.
For example, the August short-dated option expires on July 21, 2023, and the September short-dated option expires on Aug. 25, 2023.
Remember to strategize with your grain market advisor. They can help explain how short-dated options work (puts or calls and whether they are purchased or sold) and the associated risks, which are critical to understand for proper implementation. A big benefit is that short-dated options can provide farmers an opportunity to reduce out-of-pocket costs and still protect a price floor.
They may be useful for such events as upcoming USDA reports, near-term weather events, or any other situation where protection for a shorter period of time may be warranted. And remember, because you’re buying a shorter time period of coverage, they cost less, and you’ll save money—relative to a traditional option.
We can never outguess what a market will do, or what Mother Nature has in store for us. Using risk management and being prepared to protect value is something within your control.
If you have questions, you can reach Naomi at [email protected] or find her on twitter @naomiblohm.
Futures and options trading involve commissions and fees, significant risk of loss, and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Reproduction of this information without prior written permission is prohibited. Total Farm Marketing refers to Stewart-Peterson Group Inc., Stewart-Peterson Inc., and SP Risk Services LLC. Stewart-Peterson Group Inc. is registered with the Commodity Futures Trading Commission as an introducing broker and is a member of National Futures Association. Stewart-Peterson Inc. is a publishing company. SP Risk Services LLC is an insurance agency and equal opportunity provider.
