A dejected southern Minnesota farmer at a recent seminar said, “I just sold some corn at $1.50/bu. — doesn't the price have to move higher?”
I responded with two questions and a comment:
How did the price get down to $1.50? “The basis is 52¢ under and I am getting hit with about 20¢/bu. quality discount.”
How much do you have to sell? The sad response was, “Almost all of it.”
I told the truth. Without any weather problems, cash corn prices are more likely to drop into late September to early October. Also, with the huge amount of cash corn in the western Corn Belt, if futures rally basis levels will get still wider, so holding cash corn is a losing proposition.
Failure to execute on a marketing plan can create negative financial results, even in a good crop year.
Let's review the three marketing mistakes that were made and then look ahead at how to avoid being in that position in 2006.
Not forward pricing any corn ahead. Eight out of 10 years forward pricing corn and soybeans during the spring/early summer weather scare is the right marketing move. This farmer was selling corn at $1.50 a bushel in August that could have been delivered off the combine last fall for $2.60-3/bu.
Staying bullish during the spring/summer weather scare and not pricing any corn when a second and third chance was offered. Keep in mind that the news is always bullish when prices are high.
Letting the corn go out of condition is tough on farm income and bad for the entire grain marketing system. By selling some each month in the April through June time period you not only spread out your marketing risk, but also make it a lot easier to keep your crop in condition.
If you found yourself with a lot of corn and soybeans during the August price collapse, what can you do differently next year to make better marketing decisions? I have these three suggestions.
Use a spreadsheet approach on at least 50% of your production. It isn't price alone that counts, it's yield times price that equals dollars per acre.
Certainly the 2004 crop — with the large yields that most producers harvested in 2004 — had the potential to be sold at a super profit on the March/June rally. When the dollars-per-acre profit target is hit, sell some. If the profit level improves, get more sold.
Don't worry about what is going on in Washington, D.C. or South America. Sell at least 50% of your crop based on your yields and your profits.
Make incremental sales. By making 10 sales of 10% or five sales of 20%, you are more likely to come out with a good average. It keeps some cash flow coming in. And by moving some grain out every month, the rest of the grain will usually stay in better condition. Also, by the time you get to late July or early August, you should only have 10-20% to sell.
Make seasonal sales. A review of the market action over the last 10 or 20 years shows that 80% of the time, the best corn and soybean selling opportunities are usually in the April through June time period. By making 10-20% cash and new-crop sales during that time, you are usually making the right financial and marketing move. Sure you will have some years like 1988 or 2003 when prices rally into the harvest, but what you gain in those rare years is minimal vs. what you make in the normal marketing pattern years.
For producers who have followed our earlier recommendations and have 40-80% of the new crop sold ahead with hedges and/or puts, there are some keys to watch for in the next 30-60 days.
Make sure you have all the forms filled out to capture the LDP right at harvest. Odds are good that we will see an early harvest low and the best corn LDP before the nationwide harvest is at 50%.
If you have storage, consider rolling your December 2005 corn hedges out to the March 2006 contract if March hits 11-13¢ over December. Not only is this a good carry, but also odds are good basis levels will improve by 10-20¢/bu. by early 2006. Basis is a concern for those who have to sell right off the combine.
If you can choose when to deliver, odds are good that your best basis will occur right at the start of harvest or when harvest is winding down. Check with several elevators, mills and processors before you set the basis. We're likely to see large basis swings this fall.
Alan Kluis is executive vice president of Northstar Commodity Investment Co. If you have marketing questions or want information, write: Northstar, 1000 Piper Jaffray Plaza, 444 Cedar St., St. Paul, MN 55101; call: 800-345-7692 or e-mail: [email protected].