Todd's Take

Do Corn Puts Have a Place in 2021?

Todd Hultman
By  Todd Hultman , DTN Lead Analyst
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December corn closed at $5.46 1/4 on Thursday, April 29, 2021. Given all the uncertainties ahead, does it make sense to buy a December $5.00 corn put and limit downside risk to roughly $4.68? (DTN ProphetX chart by Todd Hultman)

Now on my 62nd successful trip around the sun, I can't help but have a sense of appreciation for the role seasons play in our lives. The arrival of spring planting feels good, as there is something familiar and grounding about it all.

As we saw in 2020, when seasonal rhythms go awry, it is easy to become disoriented. Here in early 2021, some of that dizzy confusion still lingers, with cash corn and soybean prices trading near their highest levels in over seven years.

In the May issue of DTN's Progressive Farmer magazine, I wrote about how last year's global pandemic threw corn and soybean prices to their lows uncommonly early in the year, closer to the time when highs are usually made. In the fall, when buyers of feed grain tend to look for bargains, corn and soybean prices were already well on their way to higher peaks that may not have been reached yet.

The one-two punch of coronavirus, followed by surprisingly large demand from a country that is growing faster than we can imagine, jarred markets out of their typical seasonal tendencies and sent prices to levels that would have seemed unreal just a year ago. Even now, with various levels of drought threatening Brazil and the northwestern U.S. Corn Belt, corn and soybean prices don't look so sure of themselves, encountering a roller coaster of volatile trading this week.

One of the traditional benefits of April is that it is often a good time to buy put options on new-crop corn and soybean contracts. In a more typical year, corn and soybean prices tend to trade quietly over the winter, allowing option premiums to shrink by the time April comes along.

This year, three-month price volatility is already much wider than usual. December corn is trading above $5.00 and November soybeans are above $13.00, both near their highest spot price in over seven years.

With this year's prices higher than normal, spring crop insurance coverage is based on $4.58 a bushel for corn and $11.87 for soybeans (see "Insurance Guarantees Highest in Five Years" by DTN Farm Business Editor Katie Dehlinger at: https://www.dtnpf.com/…).

Assuming average yields, 80% insurance coverage would protect a producer from December corn prices trading below $3.66 per bushel in October and from November soybeans trading below $9.49 a bushel. Even if crop prices don't drop that much, getting the insurance and the broad coverage it offers is usually a wise choice -- not much different than paying for home insurance, even if a tornado doesn't strike.

Along with crop insurance, a December corn put option is another way of securing price protection without regard to yield and, unlike crop insurance, can be cashed out at any time before expiration on Nov. 26, 2021.

Going over Thursday's list of option choices for December corn, there were two that caught my eye. Traditionally, I look for an inexpensive put option as a cheap form of catastrophe insurance. This year's candidate is the December $3.80 corn put, going for roughly 3 cents per bushel on Thursday's close (April 29).

The pro is that this option requires little outlay and offers downside protection if December corn prices fall below $3.77 per bushel. The option also offers more flexibility than crop insurance as it allows the owner to get out whenever he or she wants.

The con of this cheap put is that the likelihood of December corn falling below $3.77 before Nov. 26 is admittedly low -- not impossible, but a longshot. The other con is the $3.77 floor is so far away, the protection doesn't really take advantage of today's high prices.

Another possibility that wouldn't normally catch my eye, but did this year: the December $5.00 corn put, going for less than 32 cents on Thursday's close. I don't normally consider corn options that expensive, but hear this one out:

For roughly $1,600, excluding commissions and slippage, a corn producer that buys this option gets a minimum floor price of $4.68 per bushel on 5,000 bushels of December corn between now and expiration on Nov. 26. Based on Thursday's close in December corn of $5.46 1/4, the minimum price floor is less than 80 cents away. If corn prices go up, a producer still benefits.

If December corn expires at $5.00 or above, the owner loses the entire $1,600 put, plus commission and slippage. Of course, a corn producer still has his or her cash corn at that point and can then sell the corn for whatever it will bring, or store it -- the usual post-harvest choices.

Spot corn just traded up its 40-cent limit on Tuesday, April 27, so frankly, a protective floor 80 cents away in this volatile market isn't all that far. Considering the uncertainties of China's demand, Brazil's weather, U.S. weather, the June planting report and coronavirus -- to name the risks we know -- this expensive corn option has benefits to consider.

The most common hurdle to overcome when considering puts is that it feels strange to invest money in a scenario that we don't want to happen. Especially this year, when there are so many bullish factors supporting prices, it's easy to ignore the risk of prices possibly turning lower.

I agree, significantly lower corn and soybean prices don't seem likely now. But just as I didn't anticipate a global pandemic in 2020, I can't guarantee how prices will turn out in 2021, and that is why I mention these option choices.

Last year's big disruptions to the market's usual seasonal patterns brought their own confusion, and this year's prices are ripe for volatile behavior. Considering a more expensive put option than you might normally buy is one way of taking advantage of today's high prices and limiting the damage of downside risk.

Best wishes in a volatile year ahead.

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

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

Follow him on Twitter @ToddHultman1

Todd Hultman