By Chris Clayton
DTN Ag Policy Editor
OMAHA (DTN) -- Corn and soybean futures are facing some downside price risks that should cause farmers to take a look at risk management strategies such as put options to prevent a downward spiral.
If you disregard the possibility of so-called "black swan" events, corn and soybean farmers could see prices falling due to higher interest rates, a subsequent stronger dollar, trade battles sparked by President-elect Donald Trump -- along with possible changes in biofuel policies -- and the potential of yet another year of large feed grain and oilseed crops globally.
All the while, the December 2017 corn contract is still sitting at $3.86 a bushel and the closer March 2017 contract is at $3.57 a bushel. The November 2017 soybean contract is at $10.09.
The DTN National Corn Index, which is an average of spot bid prices from more than 3,600 U.S. elevators and other grain buyers, has been around 40 cents under the nearby Chicago futures contract in recent days. Cash corn bid prices, as plotted on the DTN Market Tracker map, range from around $2.90 per bushel in western Kansas to above $4.30 per bushel in eastern Pennsylvania and DelMarVa poultry areas. The DTN National Soybean Index has been around 70-73 cents under Chicago futures, with the Market Tracker map showing ranges from the mid-$8.50s per bushel in the Dakotas to a high above $10.50 near Gulf of Mexico ports.
Those prices may not be anybody's Holy Grail, but they might look pretty good if interest rates keep going up, the dollar keeps jumping or the new president does indeed ignite a trade war with China or Mexico.
Selling futures locks in the price, minus the basis, but prevents farmers from taking advantage of a price rally. To protect the price floor, farmers need to consider put options. Puts generally don't make money and often expire worthless, but they are an insurance against a worst-case market scenario.
On Monday, a $3.80 put on December 2017 corn futures on the CME was trading at 29 cents to 30 1/2 cents each on a 5,000 bushel contract, with a $3.50 put selling at 15 cents a bushel.
"Volatility has come down, but you are still looking at a year's value for only 30 cents," said DTN Senior Market Analyst Darin Newsom.
Matthew Weigand, a commodity broker in Lincoln, Nebraska, at Future One, agreed. "If you are worried about a worst-case scenario, you can go in and buy $3 puts for 3 cents," Weigand said. He noted a $9-per-bushel soybean put was running at 20 cents per bushel.
David Hightower, founder of the Hightower Report, said the biggest risks for farmers are in the first 90 to 120 days of 2017. He noted farmers used to be more wary of puts because they often expired worthless, but the volatility in the market is greater now.
"If I buy a put as a farmer I have already transitioned my position into a volatility play. If the market does nothing, that's the worst-case scenario," Hightower said. He added, "Do you want to bet the farm on hoping that somebody is right about their opinion or that something won't happen?"
(Editor's Note: Specific recommendations from DTN's Six Factor Market Strategies can be seen by clicking http://bit.ly/…)
Here are some of the scenarios out there that could dramatically affect prices in the coming year:
INTEREST RATES
The Federal Reserve Bank could raise interest rates in December, an issue that has come up again and again throughout the year. Last week, Federal Reserve Chair Janet Yellen said in congressional testimony that gradual changes in the economy will warrant gradual increases in the federal fund rate. Yellen noted that "such an increase could well become appropriate relatively soon" if the economy continues to signal positive labor and economic activity.
Interest rates remain historically low and are currently at 0.5% after the Fed raised rates 0.25% last December.
Higher interest rates signal a stronger domestic economy, but it also could continue to strengthen the dollar, which has already hit a 13-year high this month relative to other currencies of major trading partners. A higher dollar has multiple effects: U.S. goods, such as farm commodities, become more expensive for overseas buyers. Further, other countries or foreign businesses carrying debt tied to the dollar see those debts increase relative to their own currency.
The rising dollar will increase the costs of U.S. exports, a challenge for U.S. farmers who draw a higher percentage of their sales and income from exports than in the past.
BIOFUEL POLICIES
A big risk for corn growers is change to the Renewable Fuels Standard that would then translate into weaker demand for a market expected to use 5.3 billion bushels.
During the presidential campaign, Trump declared himself to be a strong supporter of ethanol. Yet, Trump's leader of the transition team for the Environmental Protection Agency is headed by Myron Ebell, a critic of the RFS. Heading Trump's transition team for the Energy Department is Thomas Pyle, president of the American Energy Alliance, which has a link on its website, "End the RFS." The American Petroleum Institute also continues to push for Congress to change and possibly repeal the RFS.
Outgoing Agriculture Secretary Tom Vilsack has expressed confidence the RFS would be fine under Trump, largely because there are too many jobs and rural infrastructure tied to ethanol and biodiesel to risk dismantling it.
TRADE
The new administration is going to make a push to renegotiate the North American Free Trade Agreement. The plan hasn't been released, but the Wall Street Journal detailed Monday that a likely scenario would lead to more tariffs and other barriers to reduce the $58 billion trade deficit with Mexico.
Any changes could put stress on agricultural trade. The U.S. last year exported $2.3 billion in corn to Mexico, $1.4 billion in soybeans, $1.3 billion in dairy products, $1.3 billion in pork products and $1.1 billion in beef products.
Then there is China, which is expected to account for $20 billion in U.S. ag exports last year. Soybean export commitments to China for the 2016-17 crop total 19.4 million tons, a 23% increase from a year ago.
China is watching Trump closely. This past weekend, Chinese President Xi Jinping, at the Asia-Pacific Economic Cooperation summit, called Trump's election a "hinge moment" for U.S.-China relations. As a candidate, Trump called for a 45% tariff on Chinese imports. The Global Times, a state-owned newspaper in China, warned of a "tit-for-tat approach" if Trump really wanted to push it. News stories on the situation report the potential of an optimistic doubling of ag exports to China to U.S. farmers being big losers if trade disagreements give South America, Ukraine and other exporters the chance to step in.
ANOTHER BIG CROP?
As DTN reported last week, Brazil and Argentina are looking to rebound from last year with both countries expected to boost production of corn in 2017.
A logical case could be made that American farmers aren't going to keep up the pace of production for crops such as corn, soybeans and wheat. Yet there's also nothing to indicate a significant decline in U.S. production. Early forecasts for 2017 planting intentions peg soybean planting at more than 88.4 million acres and corn at just under 91 million acres.
As the University of Illinois' Farmdoc Daily noted, dialing back harvested corn acres to 83.3 million acres and plugging in an average yield of 168 bushels per acre still makes a 14.1-billion-bushel corn crop. That would add to a projected 2016-17 ending stocks of 2.4 billion bushels. That's potentially a lot of corn in the bin next fall that would carry forward to current expectations of 2017-18 ending stocks of 1.9 billion bushels. http://farmdocdaily.illinois.edu/…
With soybeans, there's often not much acreage lost from planting to harvest. If harvest is 86 million acres, a 48 bpa average would come to a 4.1-billion-bushel crop, added to a 480-million-bushel carryover from 2016-17.
Chris Clayton can be reached at Chris.Clayton@dtn.com
Follow him on Twitter @ChrisClaytonDTN
(GH/AG)
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