Producers have the opportunity to hedge new crop exposure throughout the crop year with Short-Dated New Crop (SDNC) options, which have lower premiums than long-dated options due to lower time value. SDNC options are tied to futures contracts representing the product’s new crop but expire at various points throughout the old-crop year, allowing market participants to dynamically hedge exposure throughout the year as conditions change at lower cost.

View SDNC options fact card

Key features of Corn SDNC:

• Short lifespan allows for targeted hedging surrounding high-impact events or times of year
• Lower premiums than long-dated options due to lower time value
• Defined margin costs in the form of option premium when purchased

A new listing cycle will begin on the first trading day following the expiration of the next standard September option.

Buying a put option is widely considered analogous to buying an insurance policy: the buyer pays a cost (in the form of a premium) and receives protection against downside risk. A Long-Dated New Crop (December 2022) Corn put option would provide a producer with the insurance policy he needs, tailored to his new crop exposure; though if purchased early in the crop year, the buyer will pay a high premium due to long time value and will wait months to expiration¹. A Short-Dated New Crop option will provide the buyer with that same tailored insurance policy but with a lower premium and nearer-term expiration.

Example:

A producer with new-crop corn exposure wants to hedge their risk surrounding the release of the March 31, 2022 USDA Stocks and Prospective Plantings reports. Buying SDNC put options provides downside price protection with a lower premium compared to buying December 2022 Corn put options.

Looking back to the March 2021 USDA Stocks and Prospective Plantings Report

The release of the March 2021 USDA Stocks and Prospective Plantings Report marked the beginning of a months-long rally and ensuing volatility in new crop December 2021 Corn futures. March 31, 2021 saw a single-day upward move in December 2021 Corn futures of 5.52 percent. Buying a SDNC Corn put option provides obvious protection for a bearish move, though in the case of last year’s report, buying SDNC Corn put options before that report would have allowed a farmer to establish a price floor from which to stay long into the subsequent bull market.

Application: Buying SDNC Corn put options before the March 2022 USDA Stocks and Prospective Plantings Report (Hypothetical)

Suppose that on March 17, 2022, December 2022 (new crop) Corn futures (ZCZ2) are trading at $5.70 per bushel. The producer wants to hedge his risk going into the March 31, 2022 USDA Stocks and Prospective Plantings Report but does not need the long-term protection provided by a long-dated Corn option. Buying May 2022 SDNC Corn put options (OCDK2), which expire on April 22, 2022, can provide protection against market activity surrounding the number at lower premiums than long-dated December 2022 Corn options (OZCZ2).

Date: March 17, 2022

December Corn Futures Price on March 17, 2022: 5.70/bushel

Instrument: OCDK2 – expires April 22, 2022

OCDK2 Strike Price: 570

OCDK2 Premium: 12.00

Physical Position: Anticipated new crop harvest of 50,000 bushels

Strategy: Buy 10 SDNC Put options

For comparison, on this date, buying a December 2022 Corn put option with a 570 strike price would demand a premium of 45.00, compared to a premium of just 12.00 for OCDK2. Both OZCZ2 and OCDK2 exercise into December 2022 Corn futures.

The corn producer chooses an at-the-money put option for his hedge because he is comfortable with the current trade price and wants protection should the market dip lower. The producer chooses to enter the trade two weeks prior to the report to beat any pre-release price drift. Buying 10 OCDK2 puts to fully hedge his anticipated crop harvest of 50,000 bushels, the producer stands to lose only the premium if the price of ZCZ2 were to rise. If the price of ZCZ2 falls, the producer would collect profit from the option upon its expiration, offsetting his physical losses minus the cost of premium.

If the price of December 2022 Corn futures falls from 570 on March 17, 2022 to 540 on April 22, 2022 (after the March 31, 2022 USDA release), an unhedged physical position of 50,000 bushels would see a notional loss of $15,000. At an expiration price of 540, OCDK2 would offset $9,000 of that loss. Buying a put caps the downside risk at the total premium price, or in this case, $6,000. If the report is bullish, the producer’s cash position will still be able to benefit, minus the premium cost. Long-dated OZCZ2 options would provide similar protection on the USDA number, but with the higher 45.00 premium, the cost would increase to $22,500 to fully hedge the producer’s anticipated crop, rather than only $6,000 with SDNC puts.

Alternatively, if the producer were interested in very short-term exposure and the March 2022 USDA Stocks and Prospective Plantings Report were not impactful, he could sell the December put with only a loss in some premium due to now-shorter time value.

This material is directed only at, persons who are: (i) investment professionals (as that term is defined in article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (“FPO”)), (ii) high net worth companies (as that term is defined in article 49 of the FPO) or (iii) any other persons to whom it may lawfully be communicated. Accordingly, persons who (i) do not have professional experience in matters relating to investments or (ii) are not high net worth companies, should not act or rely on this material. The financial instruments and / or services detailed in this material will only be available to high net worth companies or investment professionals (as defined above). If you are not a high net worth company or investment professional (as defined above) you cannot invest directly and are unable to gain access to the relevant financial instruments. CME GROUP DOES NOT REPRESENT THAT ANY MATERIAL OR INFORMATION CONTAINED HEREIN IS APPROPRIATE FOR USE OR PERMITTED IN ANY JURISDICTION OR COUNTRY WHERE SUCH USE OR DISTRIBUTION WOULD BE CONTRARY TO ANY APPLICABLE LAW OR REGULATION.