By Todd Davis
The potential for farmers to lock-in corn profits with a cash-forward contract has been limited since March. The cash corn price for October delivery has been working steadily lower since the March 31st Prospective Plantings report (Table 1). The average corn price is $0.30/bushel lower from the March 27 price and about $0.16 lower from last month (April 18). Unlike soybeans, cash corn bids were not rocked by the May WASDE and have increased $0.07/bushel above the May 12th cash bid price (Table 1).
Cash bids for October delivery are currently below budgeted break-even price levels. 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 (CFC) of $3.66/bushel would lock in a loss of $0.19/bushel. Pricing opportunities may arise this summer if weather scares occur during the growing season.
Figure 1 compares the price risk management strategies for corn. A CFC at $3.66/bushel is $0.19/bushel below the break-even price that just covers total cash variable costs plus cash rent. Buying a just-out-of-the-money put ($3.80 strike price) would establish a price floor below the break-even price at $3.46/bushel. This strategy would limit a cash loss to -$0.39 per bushel (Figure 1). If December corn futures are at $4.00 per bushel or greater, the $3.80 put would provide a price greater than the CFC price. The cash sales at harvest strategy (red line) demonstrate the great price risk that exists in corn and that risk management could be used to limit losses (Figure 1). The $3.80 put would cover total variable cash costs plus cash rent when the December corn futures price is at $4.20/bushel or higher (Figure 1).
Table 2 and Figure 2 both show that there continues to be opportunities to manage soybean price risk prior to harvest. Cash soybean bids for October delivery have been under price pressure since April 3 but rallied from a recent low of $9.27/bushel on May 1 to $9.38/bushel on May 8. The May WASDE released May 12 reduced cash bids by $0.21/bushel from the price on May 8. However, cash bids have recovered somewhat after the report and averaged $0.07/bushel higher on May 15 (Table 2). The large South American harvest and potential of another large domestic crop has pressured prices lower throughout the spring.
Figure 2 illustrates the price risk management alternatives for soybeans are better than those for corn. A CFC at $9.24/bushel would lock in a margin of $0.84/bushel per bushel contracted over cash variable costs plus cash rent (Figure 2). A $9.40 put would establish a price floor at $8.75/bushel which is a $0.35 margin over the total cash variable costs plus cash rent target of $8.40/bushel (Figure 2). The cash sale at harvest strategy is not as compelling for soybeans given the opportunity to manage margins on a percentage of production prior to harvest. Table 2 is a reminder that these profitable pricing opportunities can disappear quickly. Look at cash bids on May 12 compared to May 8 (Table 2).
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