“In that case, some are considering hedging the insurance payment on their production shortfall by selling futures contracts at prices higher than expected to exist in October,” he said.

“There are obvious risks with that strategy because prices above the selling price would result in margin payments and foregone income.

“Those who are considering hedging insurance payments may also want to consider an averaging strategy and/or the use of options to manage the risk.”

Good explained more about the logic of this expected price pattern. He said it is based on three tenets.

First, prices need to move sharply higher in a relatively short time frame so that consumption becomes unprofitable to some end users and the overall pace of consumption is reduced to be in line with expected supplies.

Second, a short crop is expected to be followed by much larger production in the following year as weather conditions return to normal and producers respond to the incentives of high prices.

Third, once prices peak and start to move lower, an extended period of declining prices is required to re-build the pace of consumption to the level of subsequent production.

The timing and magnitude of the price peak and the speed and magnitude of the subsequent price decline are determined by the magnitude of the production shortfall, the timing of the recognition of the shortfall, the strength of demand for the crops, and the production response (domestic and foreign) in the following year.

“There isn’t a universally accepted definition of a short crop, but it is generally defined in terms of a U.S. average yield that falls below trend value by some threshold double-digit percentage,” Good said.

For corn, there have been 10 other years since 1970 in which the crop could be classified as short. These include 1970, 1974, 1980, 1983, 1988, 1991, 1993, 1995, 2002, and 2011. The price pattern in those years generally followed the expected pattern described earlier but with some exceptions, Good said.

In particular, the timing of the price peak varied considerably in those years.

The price peak occurred early in 6 of those years (1970, 1974, 1980, 1983, 1988, and 2002) but ranged in timing from June to November.  

Prices did not peak in the same month in any 2 of those 6 years. In addition, the price peak occurred in January following the 1993 harvest and in July following the 1995 harvest.

For the 1991 and 2011 crops, the price peaked in August before harvest and again later in the marketing year.

For soybeans, 8 previous years might be described as short crop years. These include 1974, 1976, 1980, 1983, 1984, 1988, 1993, and 2003.

Like corn, the timing of the price peak varied in those years. Prices peaked early, ranging from June to November, in 5 years; had a double peak in 1993-94 (July before harvest and June after harvest); peaked in April following the 1976 harvest; and peaked in March following the 2003 harvest.