Tuesday, March 17, 2015

Current Price Risk Management Alternatives for Corn and Soybeans.

Todd Davis, Extension Economist, University of Kentucky

Current Price Risk Management Alternatives for Corn and Soybeans It is not too early to use price risk management tools to protect some of the projected corn and soybean revenue for this year. Risk management alternatives include locking in a cash price using cash-forward contracts (CFC) on a conservative percentage of expected production. A CFC removes price risk but you may feel regret if cash prices at harvest are higher than the CFC price. Another alternative is to buy put options to place a price floor but still benefit from any potential increase in futures price from now until harvest.

Cash bids listed on DTN on March 13 are used to evaluate potential risk management benefits of cash-forward contracting versus buying an at-the-money put option versus the “do nothing” strategy of selling at harvest. Several locations did not offer a harvest delivery price, so contracting options for corn and soybeans may be limited at this time. Most corn bids for October delivery were at $3.85/bushel. Soybean bids for October delivery ranged from $9.23 to $9.43/bushel.
Figure 1. Comparison of Price Risk Management 
 Strategies for 2015 Corn.

Figure 1 compares the price risk management strategies for corn. A CFC at $3.85/bushel would just cover total cash variable costs plus budgeted cash rent. Buying a just out-of-the-money put ($4.00 strike price) would establish a price floor at $3.57 which is below the break-even price. This strategy would limit a loss to -$0.28 per bushel (Figure 1). If December corn futures are at $4.34 per bushel or greater, the $4.00 put would provide a price above the CFC price. The cash sales at harvest strategy works best if you know with absolute certainty that cash prices are going to be higher at harvest than they are today.

 Figure 2 illustrates that there are better price risk management opportunities available now for soybeans than for corn. Soybean prices have remained strong in spite of increased domestic stocks and another large South American soybean crop that is starting to be harvested. The benefits of either using a CFC or buying a put option for soybeans are much clearer than that for corn. A CFC at $9.30/bushel would lock in a margin of $0.90/bushel per bushel contracted over cash variable costs. A $9.60 put would establish a price floor at $8.79/bushel which is a $0.39 margin over the total cash variable costs and cash rent target of $8.40/bushel. The cash sale at harvest strategy is not as compelling for soybeans given the opportunity to manage margins on a percentage of production while the seed is still in the bag.

Figure 2. Comparison of Price Risk Management
Strategies for 2015 Soybeans.
Figure 2. Comparison of Price Risk Management Strategies for 2015 Soybeans. You should know what price is needed from the market to meet your profitability goals. Sometimes pricing opportunities present themselves prior to planting or early in the growing season. Pro-active managers need to know their marketing targets and monitor the cash and futures market for risk management opportunities.

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