By Todd Davis
The potential for farmers to lock-in substantial corn profits with a cash-forward contract has been limited so far this spring. Assuming the per bushel total variable cash costs plus per bushel cash rent for corn in Western Kentucky is $3.85/bushel, a cash-forward contract would not provide any cushion to cover fixed costs, service debt, provide for family living, and to fund future business growth.
The cash bids for 2015 corn for October delivery, as posted on DTN for various locations and dates, are reported in Table 1. The cash corn price for October delivery has been holding steady in the $3.85 to $3.97 price range since March 6. The average cash price for October delivery peaked prior to the March 31st reports and has decreased in response to the larger than expected acreage, stocks, and April WASDE. Pricing opportunities may arise due to weather if planting is delayed and weather scares occur during the growing season.
Figure 1 compares the price risk management strategies for corn. A CFC at $3.85/bushel is equal to the break-even price that just covers total cash variable costs plus cash rent. Buying a just-out-of-the-money put ($4.00 strike price) would establish a price floor below the break-even price. This strategy would limit a cash loss to -$0.25 per bushel (Figure 1). If December corn futures are at $4.25 per bushel or greater, the $4.00 put would provide a price greater than the CFC price. The cash sales at harvest strategy (red line) demonstrates the great price risk that exists in corn as cash prices for October delivery are right at the break-even levels to cover cash input costs and cash rent (Figure 1).
Cash soyben prices for October delivery rallied after the better than expected reports on March 31 (Table 2). However, the record South American crop and April WASDE weighs on the soybean futures market and has reduced the average cash price for October delivery $0.31/bushel in a week. If corn planting is delayed, the potential additional soybean acres will continue to weigh heavily on the soybean market reducing pricing opportunities.
Figure 2 illustrates the price risk management alternatives for soybeans are better than those for corn. Soybean prices for October delivery have declined $0.26/bushel since March 6 (Table 2). A CFC at $9.25/bushel would lock in a margin of $0.85/bushel per bushel contracted over cash variable costs plus cash rent (Figure 2). A $9.40 put would establish a price floor at $8.72/bushel which is a $0.32 margin over the total cash variable costs plus 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.
Cash wheat prices for June delivery have increased by $0.41/bushel, on average, from March 6 (Table 3). Wheat prices peaked on April 3 at an aveage of $5.38/bushel before giving up $0.12/bushel in a week. The uncertainty over the condition of the winter wheat crop in the Southern Plains could provide pricing opportunities if there is significant damage. As always, managers should know their costs and monitor the market for risk management opportunities.
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