Todd's Take

Weighing Crop Price Risks in 2022

Todd Hultman
By  Todd Hultman , DTN Lead Analyst
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As corn prices have gone higher, the price of new-crop corn put options have gone lower, including the December $5.00 put shown in this chart and priced at 8 1/2 cents on Thursday's close, March 24. There is plenty of risk ahead in both directions for corn prices in 2022. (DTN ProphetX chart by Todd Hultman)

Last week, I tried to help readers understand the risks and possible pitfalls of making new-crop sales in 2022. This year's unique problem is that an unforeseen escalation in the Russia-Ukraine conflict could drive grain and energy prices much higher than hedgers anticipate and stress markets with a sudden need for cash to meet margin calls. (See my March 18 column here: https://www.dtnpf.com/….)

The potential risk of having a hedge account caught in a series of endless margin calls is so disastrous that at the end of that column, I suggested this may be a good year to avoid making new-crop sales altogether. Especially if the producer doesn't want to buy call options.

After all, Brazil's soybean crop was hurt by drought, and it is not likely Ukraine will be exporting much corn, wheat or sunflower oil in 2022. Corn, soybeans and wheat prices are all likely to remain more profitable than usual this year.

The risk of not making new-crop sales is that it leaves producers more vulnerable to downward moves in prices, especially in the few months before harvest. Today's bullish expectations are no guarantee bearish events won't happen in 2022. Bearish possibilities include a peace deal between Russia and Ukraine, an unexpected resurgence of oil production, a string of interest rate hikes, another coronavirus variant, better-than-expected growing weather and any combination of the above.

Part of this year's good news for producers is that February price averages of $5.90 for December corn and $14.33 for November soybeans allow producers a higher-than-usual level of crop insurance protection. Assuming average yields are achieved, a policy with 85% coverage protects the revenue a producer would get from roughly $5.00 corn and $12.18 soybeans. Given this year's higher input costs, that may not be enough coverage to prevent losses on every farm; but for many, it should come close.

As usual, crop insurance is the best first step of risk protection a producer has available, and I hope everyone takes advantage. In 2022, crop insurance may be all the downside protection a producer needs.

So far this year, all the talk of falling prices is theoretical. Long before crazy Vladimir gave the order to start rolling tanks into Ukraine, corn and soybean prices were already trending higher, supported by concerns of drought in South America. With less than one week remaining in March, December corn and November soybeans remain above their respective 25-day averages, strict definitions for uptrends in this nervous and potentially dangerous market.

On Thursday, March 31, USDA will release its survey of Prospective Plantings. The track record of this report hasn't been so good lately and the market may not give it much weight while Ukraine remains under attack.

In 2020, planting intentions overshot final corn plantings by 6.3 million acres. Last year, surveyed intentions were 2.3 million acres below final corn plantings. For soybeans, the intentions have been closer if we overlook the 8.5 million-acre miss in 2019, a year in which extremely wet conditions cut soybean planting efforts short.

At USDA's Ag Outlook Forum in late February, USDA started the new season with planting estimates of 92.0 million acres for corn and 88.0 million acres for soybeans. Private estimates I've seen since then are close, but a little lower on corn and a little higher on soybeans. My personal guess is 89.0 million acres of corn and 88.0 million acres of soybeans, allowing for some traditional loss in the Western Corn Belt to other profitable choices, of which there are many this year.

The main risk of lower prices in 2022 isn't so much the U.S. might produce too much, as has often been the case. The main risk is that something might happen to make the world look like a less dangerous place. Beyond the bullishness of crop losses in South America and Ukraine in 2022, there is a big fear premium in today's prices as potential sellers have been largely scared out of the markets by fear of what more could happen in Ukraine.

Viewing the drone pictures of leveled neighborhoods in Mariupol, Ukraine, and waking to news that North Korea just fired an intercontinental ballistic missile into the sea, the word "normalization" seems like a distant dream. I don't know a good way to handicap today's odds, and prices are showing no inclination of trading lower at the moment.

For any of the small minority of farmers who passed on getting crop insurance, at some point in the next two months, you might want to check out the quotes of new-crop put options. The potential for price volatility in 2022 remains high in both directions.

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Comments above are for educational purposes only and are not meant as specific trade recommendations. The buying and selling of grain or grain futures or options involve substantial risk and are not suitable for everyone.

Todd Hultman can be found at Todd.Hultman@dtn.com

Follow him on Twitter @ToddHultman1

Todd Hultman