USDA Prospective Plantings is released annually and reports the expected planted acreage for the upcoming crop year for principal crops on a state-level basis. The report also quantifies the prior crop year’s harvest. Among USDA reports released throughout the year, Prospective Plantings is arguably the most impactful with respect to CBOT Corn, Wheat, and Soybeans pricing: surprising reports sent CBOT Corn futures limit up in both 2021 and 2022 and moving significantly intra-day in 2023.

New Crop Weekly options, launched in January 2023, are a risk management tool allowing market participants to hedge their immediate-term new crop risk at premia lower than those offered by conventional long-dated new crop options. Settling to December Corn or November Soybean futures, New Crop Weekly options hedge around high-impact events such as USDA reports, pinpointing new crop exposure.

Case Study: A Minnesota Farmer’s New Crop Risk

Jake Larson is a corn and soybean farmer in southern Minnesota. Working with his marketing advisor and accountant, Jake is very focused on taking advantage of jumps in price and has been watching 2024 new crop corn and soybeans closely. First, seeing an historically good basis level at his local elevator, Jake forward contracted 35% of his expected production for the new crop with January 2025 delivery. Additionally, to provide some flexibility in case he has reduced yields, he hedged another 20% of his expected production in the December futures. He is looking ahead to the upcoming USDA Prospective Plantings report, released on March 28, 2024, to drive his next marketing decisions.

While Jake is comfortable that he has locked in profitable prices, he also recognizes that if the market were to rally sharply because of a surprise in the report, he would both have to fund the margin calls on his short futures positions, and, like most producers, would feel like he’s leaving potential profits on the table. In a discussion with his marketing advisor, he is reminded that by buying a call, he can turn his short futures position into a synthetic put position, still providing him with downside protection but also allowing him to profit if prices go up. As they look at standard December call options, they see that current implied volatility levels make these relatively expensive. His marketing advisor suggests they look at shorter-term options including the recently introduced New Crop Weekly options on Corn and Soybean futures.

New Crop Weekly options are options on either December corn or November soybeans that are listed with tenors of up to four weeks. Like standard weekly options on Corn and Soybean futures, this shorter tenor significantly reduces the premium cost of the option.

To cover the 20% of expected production he has hedged in futures and 15% of the corn he has forward contracted, on March 17, 2024, Jake buys a $4.50[1] at-the-money call for four cents that will expire in two weeks, the day of the report release (March 28, 2024). Given the Good Friday holiday, the Weekly option will expire on Thursday. This option is considerably cheaper than the standard $4.50 call, which is currently trading at 46 cents, because of the weekly option’s much shorter tenor.

Jake and his marketing advisor go over strategies for both a bullish and bearish report. If the report turns out to be bullish and prices rally, the New Crop Weekly option will offset some of the loss in futures position. He will use the gains from the option to roll it into a Short Dated New Crop Call option to provide continued upside participation in the market if it continues to rally. If the report turns out to be bearish, he will let the call expire worthless, and while he will be out the premium paid for the option, it will be a known and minimal amount.

[1] Prices in this case study are purely hypothetical.

Figure 1: Long Call Payoff

Alternatively, if Jake and his advisor were even more bullish, they might simply liquidate both the long New Crop Weekly call and the short futures and replace them with a New Crop Weekly put. In either case, they establish a position that provides them with the hedge profile of downside protection.

CME Group offers a suite of agricultural derivatives to suit any strategy, from long-term hedging to managing short-term event-based risk. Learn more at: 

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