While farmers are hard at work harvesting corn and soybeans, there’s another task at hand – strategizing for profits in 2023.
Tight US inventories give growers a chance to lock in 10% to 15% returns on both crops. But double-digit margins also come with risks, so it’s important to understand the downside as well as the upside potential of selling a year in advance. As the last few years have clearly shown, no one has a good crystal ball to predict just how crazy things can get.
To assess sales opportunities, I’ve placed current cost estimates and 2023 futures into what-if data tables. This sensitivity analysis projects project gain or loss per acre based on different combinations of crop prices and yields for different strategies. Selling prices considered were $6.30 for corn in December 2023 and $13.60 for soybeans in November 2023, in the middle of recent trading ranges for both contracts. The crop base plugged into the model varied with prices, with stronger markets producing better cash bids.
Local production costs vary widely from year to year, so these calculations use national averages prepared by the USDA’s Economic Research Service, adjusted for changes in input costs since the agency’s last forecast was released in June. 2023 National Statistical Trend yields of 177.3 bushels and costs of $904 per acre total about $5.10 per bushel for corn. Soybean costs of $606 and yields of 52.5 bpa add up to a cost per bushel of about $11.55.
It doesn’t take artificial intelligence to see that current prices are profitable under these conditions — if yields hold. This is where the data table shines, showing the good, bad, and ugly of each decision based on how your final production compares to expectations.
Start with the base case of doing nothing and just sell what you grow from the combine next fall. Yields and futures prices aren’t the only uncertainty. The basis on buyers’ bids for fall 2023 gives an indication of what sellers expect when using futures or options and can now be set for sales on futures. The current base for 2023 appears to be 10 to 20 cents weaker than nearby levels in some locations.
Safety nets from government farm programs and crop insurance are also conjectures. With markets currently well above reference prices, most growers are likely to sign up for ARC in 2023. The corn guarantee could be around $685 an acre, while soybeans are around $430.
Crop insurance details won’t be announced until spring guarantees are set in February, but it looks like corn coverage could cost a little more, with soybeans a little less than 2022. My base case is 85% revenue protection, although growers in areas with more variable production see this as too expensive to be practical.
Yield-based systems like RP and ARC usually pay off amid extreme returns and low prices. Most years they won’t come into play for most farms, but they’re worth including in your analysis.
With all these caveats in mind, here’s what my spreadsheets predict for sales a year before harvest.
What am I worried about?
Table 1 shows the results of doing nothing now and selling the combine next fall. You don’t need reading glasses to see more black ink on corn lattice and more red ink on soybeans. But while today’s prices are profitable at normal yields, lower prices or yields could result in losses. ARC and RP mitigate losses for terrible returns and prices. But even good returns cause losses when prices fall back to the levels of a few years ago. If you’re not ready to sell, make sure you can take the pain when bad times return.
Just tear
Growers worried about another bear market, or farms facing financial stress, might consider aggressive forward pricing so they can fight for another day when good times return. 85% pricing looks profitable until rising futures offset the impact of falling yields on earnings and remove the potential protection from the government program.
Even if that were the case, $6.30 of corn on the board would limit losses to $10 an acre even in extreme conditions.
Soybeans show less room for error. Losses come faster as margins fall into the red with yield losses of 10% or more unless the market tanks enough to trigger payments from ARC and RP. Losing $75 an acre at an 85% rate is not impossible if the worst happens. To paraphrase Dirty Harry’s memorable quote: “Feeling lucky punk?”
Hold on, tiger
Instead of all or nothing, look at what happens with a slightly less extreme approach. Early pricing for a healthy chunk of next year’s crop could bring some peace of mind without swinging for the fences.
In the case of corn, losses can even be avoided entirely with this tactic, as shown in Table 3. Pricing 60% of the crop looks like the sweet spot, keeping some upside open but keeping red ink off the grid.
Selling 60% won’t work as well with soybeans, but still removes the risk of losses if yields continue while some of your powder stays dry.
Solution of the option puzzle
Using options always sounds like a great idea at first. Paying a premium upfront for the right, but not the obligation, to sell futures at a set strike price secures a floor while allowing upside potential if markets move higher. Pricing with a put also alleviates some of the worries of not having bushels to deliver from a short crop.
The “but?” options can be expensive, especially in high-priced volatile markets. And premiums for options with a year or more to expire carry a hefty fee for time value that could be lost over the long term.
Near-the-money puts for December 2023 are trading at about 45 cents a bushel, while similar options on soybeans are trading at about 75 cents in November, costs weighing on profits.
A possible alternative for those with sufficient experience in options trading is the combination of different tools. This mix-and-match approach allows strategies to be fine-tuned to provide the appropriate level of protection desired.
Predicting the outcome of options trades adds another layer of uncertainty to any forecast. Not only can futures markets change dramatically, implied volatilities that affect premiums can also vary widely. And like using futures, writing options to earn premium value introduces margin risk if the market moves against your position.
Table 4 shows one of the myriad examples for each culture. Pricing 85% of the corn by paying most of the cost of a $6 corn put by selling a $5 put and a $7.50 call leaves some downside risk when prices remain unchanged and yields fall.
The soybean strategy is slightly different, using a bull call spread to protect a covered put. This combines selling 85% futures with a short put of $11, then buying a $14 call and selling a $14 call. Like the other examples, the soybean position holds more downside potential than corn, but still offers gain if yields sustain.
Consider the cost
Before you sell, think about what might happen to your production costs. Some of your expenses may be known if land rents or mortgage payments are frozen. Other expenses, including operating interest, fuel and fertilizer, can be highly uncertain.
Fertilizers could continue to be particularly volatile depending on the aftermath of the war in Ukraine. Production in Europe, hampered by high natural gas costs, is slowly getting back on track, but the world’s supply chain is vulnerable, from overseas plants and mines to the drought-drained Mississippi River. The fall application may be complete, but the spring inventories are a different matter altogether. Hoping for peace to come everywhere may do the soul good. But betting on it could be bad for your bottom line if you don’t line up the nutrients you need.
Knorr writes from Chicago, Illinois. Email him at [email protected]
The opinions of the author are not necessarily those of Farm Futures or Farm Progress.
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