Three Risks to Watch Ahead of Planting Season

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.

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.

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.”