Corn and soybean producers turn to options in high volatility environment
By Debbie Carlson
In one look
- Short-term new crop options help farmers manage risk from USDA reports or other market-influencing events with a lower premium.
- Geopolitical events have introduced new risks for producers 2022.
Grains market players are used to unpredictability and risk, but 2022 has brought to the fore a confluence of risk few have seen.
Last year, farmers and end users faced several challenges: supply chain difficulties due to the pandemic, high input prices, inflation, plus a dry fall during winter wheat planting in the United States and droughts in the agricultural regions of Brazil and Argentina. Poor global cereal harvests prompted some importing countries to secure additional supplies to ensure adequate food reserves.
The war in Ukraine has added a deeper dimension to global food concerns. Known as the breadbasket of Europe, the region is responsible for 25% of wheat exports, as well as some corn and oilseed exports. A large percentage of the world’s fertilizer supply also comes from the region. Energy prices have risen since the invasion.
The dispute has affected Black Sea exports, limiting the source of supply that goes to price-conscious buyers such as Egypt and the Middle East, says Arlan Suderman, chief commodities economist at StoneX Financial. The loss of supply has pushed the United Nations food price index to record highs.
Market volatility has increased dramatically, says John Georgy, chief financial officer of Allendale, Inc., pointing to limit and expanded limit moves for corn and wheat. Even with high crop prices, his customers’ main concern is controlling high input costs.
Doug Kirk of Terra Plana Family Farms, which farms 8,500 acres in central Illinois, says the war has amplified the variety of risks farmers face, including potential supply shortages of inputs such as fertilizers and chemicals.
“I don’t like to pretend the sky is falling on us… but in my career, I don’t think any of these challenges have been this extreme,” says Kirk, who has been a farmer for more than 20 years.
Kirk’s fertilizer needs for 2022 are locked in, but he thinks the agricultural input shortage will be most acute in yield-enhancing products. His concern is for 2023, even if it is a year away.
Supply and demand outlook
Corn and soybean prices hit 10-year highs and wheat prices were just off all-time highs in March, so the U.S. spring planting season presents both opportunities and challenges. risk to farmers, says Suderman.
All spring-sown crops will compete for acres, especially with spring-sown Ukraine in doubt. He and Georgy are expecting a slight decline in corn acreage from last year, with an increase in soybean acreage and a modest increase in wheat acreage.
Suderman says with tight global stocks for the three food crops, importers are stepping up their purchases to provide coverage. India and Australia are currently covering global wheat demand, but he says corn and soybean sales are about double the normal weekly rate for this time of year.
But with tight South American soybean supplies, there are already fears that supplies could run out ahead of the fall harvest in the United States. The situation in the Black Sea could bring more urgency to the corn market. “This will tighten supply in the global market over the next 12 to 18 months,” Suderman said.
Kirk says recent events have changed his outlook for 2022. He’s delayed sales targets by a few months or reduced the percentages he normally wants to have reserved by certain dates. “It’s unusual but it’s likely that at harvest we’ll have very little corn or soybeans sold for cash and instead we’ll have floors in place with OTCs or options,” he says.
Short-term new crop options form a large part of its risk management approach. Ahead of the USDA’s March 31 Prospective Plantings and Grain Stocks report, he added to those positions.
“We are using new short-term crop options to hedge the margin risk on some of the margin option positions that we use in the deferred months,” he says, adding that “there is no way to grow enough of everything to solve the problem”. This year.”
Georgy says his clients also use shorter-term options, especially for corn and soybeans around USDA reports. With so much uncertainty, option premiums are high, prompting more participants to use short-term options to help reduce costs.
Short-term options offer clients a way to protect bushels by locking options closer to current prices while using strategies to mitigate margin risk.
“You know exactly what you’re going to spend,” says Georgy, noting that the higher volatility makes trading options attractive.
So far, Kirk is sticking to his crop rotation plan to plant more acres of soybeans this year, but he’s leaving open the possibility of switching a few more acres to corn, depending on how markets react. to the news.
Short-term new crop options give him flexibility at a time when costs are high and the margin for error is low. “We are actively managing our cash position at an intensity that we haven’t had to do in some time. Short-term options provide us with insurance against a sudden price change that protects our cash position at a relatively low cost,” says Kirk.
Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.