Futures prices for both the corn and soybean markets have been trending down in a steady fashion, perhaps more than most analysts anticipated for this time of the year. After a year of high prices and small supply, expectations are for crop sizes to grow and demand to diminish. So far in 2023, that is the case – and not really a surprise.
If there is any surprise, it is the speed at which prices have dropped since late February. December corn futures were hovering near $5.75 and now are near $5.00. The crop insurance spring price is $5.91 for corn and $13.76 for soybeans.
Since prices have dropped as far as they have, some (depending on level of coverage purchased) may be able to protect a potential indemnity. The payout is determined by the fall price in October. If you purchased the 95% coverage level and have normal yields, you have a price floor at $5.61, based off December futures. How would you protect (hedge) this payout?
Most likely, you would accomplish this through purchasing futures or call options. When you purchase futures, remember your risk is unlimited to the downside. If corn prices were to continue downward, you will be losing money in your futures position. The good news is your insurance indemnity will be growing. A call option has a fixed risk component (subject to the purchase price), commissions, and fees. You might consider purchasing a December call option to offset declining indemnity potential that would not expire until November 24. A more applicable and lower-cost alternative is to buy short-dated calls. Short-dated calls have a small window of time and may be more applicable in front of events like USDA reports or a developing weather pattern. As an example, July short-dated options expire on June 24 and give the owner the right (not the obligation) to own December futures at the strike price you choose.
Part of marketing is understanding your tools and the flexibility they may offer. Knowing how to protect a potential insurance indemnity could prove valuable to your operation. Make sure and have a thorough conversation with those who can implement strategy on your behalf. Before entering any position, ensure you understand the risks as well as potential. It may be difficult today to imagine corn prices rallying. Remember that weather (a variable most affecting corn yield) can have a greater impact in June, July, and August than in spring. Bottom line is to be prepared. To sit idly and not protect a payout could be costly.
Editor’s Note: If you have any questions on this Perspective, feel free to contact Bryan Doherty at Total Farm Marketing: 800-334-9779.
Disclaimer: The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Individuals acting on this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report. Futures and options trading involve 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. Examples of seasonal price moves or extreme market conditions are not meant to imply that such moves or conditions are common occurrences or likely to occur. Futures prices have already factored in the seasonal aspects of supply and demand. No representation is being made that scenario planning, strategy or discipline will guarantee success or profits. Any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to Total Farm Marketing. Total Farm Marketing and TFM refer 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 (CFTC) as an introducing broker and is a member of National Futures Association. SP Risk Services, LLC is an insurance agency and an equal opportunity provider. Stewart-Peterson Inc. is a publishing company. A customer may have relationships with all three companies. SP Risk Services LLC and Stewart-Peterson Inc. are wholly owned by Stewart-Peterson Group Inc. unless otherwise noted, services referenced are services of Stewart-Peterson Group Inc. Presented for solicitation.
About the Author: With the wisdom of 30 years at Total Farm Marketing and a following across the Grain Belt, Bryan Doherty is deeply passionate about his clients, their success, and long-term, fruitful relationships. As a senior market advisor and vice president of brokerage solutions, Doherty lives and breathes farm marketing. He has an in-depth understanding of the tools and markets, listens, and communicates with intent and clarity to ensure clients are comfortable with the decisions.