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Three Risks to Watch Ahead of Planting Season

Debbie Carlson for CME Group

AT A GLANCE

  • Corn and soybean prices remained high heading into spring, but input costs and global competition remain concerns for producers
  • New crop weekly options have emerged as a hedging tool for farmers taking on sudden or short-term risk

Ben Rand, who farms corn and soybeans in southeast Nebraska, is closely watching Brazil’s harvest this season.

“Brazil is just absolutely exploding on the production side,” Rand says of the U.S.’s top global competitor.

The South American agricultural giant’s harvested acreage for its soybean and first-crop corn will both be records for the 2022-2023 season, according to the U.S. Department of Agriculture’s Foreign Agriculture Service. The agency estimates first-crop corn harvest will be 125 million metric tons (MT), up 8% from last year, and its soybean crop will be 153 million MT, a record output if realized.

Every year there are new risks and opportunities for producers to consider. In 2023, the top risks include South American production, the cost of crop inputs, and weather, that perennial worry. Following is a snapshot of each.

Watching South America

Unlike its neighbor, Argentina, Brazil’s crop production was largely unaffected by drought conditions caused by the La Nina weather phenomenon in early 2023. Since 2019, Brazil has outpaced the U.S. in soybean production and is catching up to the U.S. with its corn output. Brazil can grow two corn crops, its main corn crop and a second crop called safrinha. The increased Brazilian production of both corn and soybean crops is a risk that U.S. farmers can’t overlook, Rand believes.

“Brazil is an agricultural powerhouse. And I think ignoring that is unwise,” he says.

In the northern hemisphere, U.S. farmers are gearing up for another busy planting season. On March 31, USDA will release its first report of the new crop season, Prospective Plantings, which will highlight what farmers intend to plant this spring.

Case Study: Hedging the USDA Prospective Plantings Report

Input Costs Still a Factor

Last year, the Russo-Ukrainian conflict caused price spikes in many commodities, including fertilizer and fuel, two of the biggest input costs for farmers. Since then, prices have somewhat retreated. Rich Nelson, chief strategist at Allendale, an agricultural brokerage based in Illinois, says fertilizer costs since December have fallen further, taking about $20 to $30 an acre off the cost of this key input. Diesel fuel prices have also retreated.

With crop prices still firm and input costs cooling, farmers could make “a moderate profit this year,” Nelson says. Citing University of Illinois data as of December, the breakeven corn price is $5.30 a bushel, and current cash bids in Illinois are around $5.60 for new-crop corn, with December futures around $5.90. U of I forecast soybean breakeven costs at about $12.10 a bushel, and November futures at about $13.90, with cash bids around $13.60.

While input prices are off of their 2022 highs, Rand is concerned about those costs and if crop prices slip, 2023 could be a tight year economically. He started actively hedging his 2023 production last fall, and is already planning for 2024 because of his concerns about the size of Brazil’s crop and how much that supply will affect crop prices.

Weather Always a Focus

The 2022 drought in the U.S. hit the Western Corn Belt hard, and it was particularly intense in Nebraska, where Rand farms is located.

Steve Georgy, president of Allendale, says spring rains could help recharge the subsoil moisture which will give row crops a good start for 2023. He notes the National Oceanic Atmospheric Administration’s long-range forecasts call for a warmer summer with normal rainfall for much of the Corn Belt.

Nelson says U.S. farmland received more moisture in January and February, with the seasonal drought index map showing better subsoil conditions. Additionally, farmers in the northern and southern hemisphere may benefit as La Nina switches over to El Nino. That may alleviate some of the dryness Argentina suffered through last year and may also mean wetter conditions in parts of the U.S. Southern Plains from Texas to Kansas. That will help grazing lands and winter wheat production, he adds.

“This will not really give us the big benefit during the reproductive phase of crop development, but this will help,” he says.

Using New Crop Weekly Options

A new hedging tool, new-crop weekly options, are available between February and August and are listed up to four weeks out at a time. They can be useful to hedge against headline risk, weather events and other short-term risks. Agricultural brokers say one of the biggest benefits to the new crop weekly options is the lower costs versus the traditional options on futures.

Read More About New Crop Weekly Options

Oliver Sloup, vice president of Blue Line Futures, says short-dated options have less time value than traditional options on futures contracts, which makes them cheaper to establish a position. For example, a traditional December corn option at the at-the-money $5.90 strike price could cost a farmer 45 cents an acre to hedge a price so far in the future. However, buying that same strike price in a new crop weekly option that expires in a week could cost 2.5 cents instead.

Georgy says shorter-dated options help farmers come up with a more flexible marketing plan by dividing up price coverage in sections throughout the year, rather than locking it in at one time.

“It’s a great opportunity in order to protect the price, because we’ve seen such volatility in our markets,” Georgy says.

Sloup sees a particular benefit to using new crop options for the coming March Prospective Planting report, which is slated for release on a Friday. He says farmers can both sell a corn futures contract and hedge their upside risk with an option that expires that day.

“They don’t have to worry about that initial knee-jerk reaction from the market that could potentially stop them out or the market just ripping higher and not looking back. They’re protected with that weekly short-dated option,” Sloup says.

Rand hasn’t used the new crop weekly options yet, but he sees them as a good way to protect his crop through volatile periods such as major USDA reports. “They could be a great way to protect your downside, or if you’re an end-user, capture the downside, or vice versa.”

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