While dodging drenching rains and frowning over flooded fields, Daren Laffey at least had one thing that was certain on his corn and soybeans: the market price. Part of them, anyway, for this year — and next.
Farming just outside Des Moines, IA, and on the edge of severe flooding earlier this summer, Laffey was among those fighting off high water as much as he was high input costs. And he was among the few growers who were able to market some of their 2009 crops early.
Forward contracting through his local co-op elevator, Laffey, from Runnels, IA, took the chance in a volatile market of locking in a small amount of $5.50/bu. corn and nearly $12/bu. beans for 2009 production. He was eyeing more sales when corn blew through $7 and beans pushed past $15.
“If those are the worst sales I make, then I can live with those prices,” says Laffey, a strong believer in early marketing, but only if he has a good idea of what input costs he'll face.
MANY GROWERS ACROSS the Corn Belt would like to have made sales further out than 2008. When prices rallied to record highs in May, then even higher in June when flooding joined strong domestic and worldwide demand, many grain companies — large and small — limited sales to this year's crop.
Like elevators, farmers and end users faced the same monster margin requirements on futures hedges. For many, there was $5, $6 then $7 corn on the futures market, but no cash market or grain contracts were available to lock in these prices.
But a few elevators, usually those with strength in numbers, provided the distant marketing for their customers. One was Farmers Cooperative Company (FC), Farnhamville, IA, which has nearly 50 locations and is the largest farmer-owned cooperative in the Hawkeye State.
FC's Bondurant location manager Dustin Weiner says there are a few growers eager to get some 2009 corn and/or soybeans sold early that have leaned toward “basis-later” contracts.
“They can set a futures price, and then set the basis before delivery, for the 2008 or 2009 crop,” he says. Cost to obtain the contract is currently 4¢/bu. for the 2008 sales and 8¢ for 2009, to help facilitate the transaction.
Most growers prefer a straight cash forward contract for 2009. In May, FC offered a $5.20 cash corn contract with a 65¢-under basis for delivery during harvest 2009. “With these prices, people like to lock in these large profits that are right in front of them,” says Weiner.
As the futures market escalated during and following the massive rainfall and flooding across much of Iowa and other parts of the Corn Belt, contracts were increased to over $7/bu. for harvest 2008, and over $6/bu. for harvest 2009, says Weiner.
“Some growers are taking advantage of the multi-year marketing capabilities, but they need to keep a close eye on their rising input costs,” says Weiner, adding that another service from the co-op enables growers to pay to store grain at the elevator even though it has been sold for distant delivery.
Laffey doesn't like to do much marketing until he knows his input costs. “I use a management consulting service that helps me determine my breakeven on corn and beans,” he says. “It involves management software that examines my input costs, insurance and marketing.
“The main thing about marketing is to know where you are and what your breakeven will be. With my management service, I can track my costs of production on virtually every farm. And the key is to know your cost of production.”
HE WOULD MARKET more of his 2009 corn and beans if he could lock in his overall input costs. As of June, he'd been able to get prices for nitrogen, but not for seed, chemicals or other fertilizer.
Dave Olsen, Mason City, IA, is Laffey's management consultant. Over 10 years ago, he started developing the MyFarm Risk Eliminator Software (www.myfarmsoftware.com) to assist in finding the breakeven yield needed to meet his profit objectives on his personal farm. As a farmer, Olsen's focus is on managing yield risk vs. price risk.
“We run marketing scenarios two or three times a year,” says Olsen, referring to his program with Laffey. “We talk every other week.”
A typical goal would be to meet your profit objectives at a yield that is 10-20% below your 10-year average yield. Any revenue losses below that can be covered by insurance. “If you can get 70-80% of your costs locked in for 2009, you should be able to feel comfortable about aggressive forward marketing,” he says.
“Forward contracting at profitable prices lowers both yield and financial risk and allows you to capture additional profits on extra bushels that aren't priced before harvest.” Olsen adds, “It's important to match these marketing strategies with long-term business goals, cash flow needs and legal structure to minimize taxes in a high-income year.”
How long is too long for locking in a price? University of Missouri Food and Agricultural Policy Research (FAPRI) Agricultural Economist Melvin Brees doesn't know, but he says growers likely can't go wrong in getting corn or beans sold at record high prices (upper $7/bu. and $15+ in mid-June).
“It's always hard to say that it was a mistake to sell at record prices,” says Brees.
He points out that between 1973 and now, only this year have soybeans been higher. “And for corn, we've only had a record high once, in 1996, before now,” he stresses.
However, continued upward swings in grain markets make growers think twice about making sales, even if they're elevator allows it. “Uptrends still point to higher prices,” says Brees. “But I think there's some validity in making sales at these levels — or at least be prepared to make them before the downturn begins.”
As far as locking in inputs, Brees says some suppliers are encouraging growers to secure early buys of fertilizer and other needs.
“It's pretty tough to do with these fuel and fertilizer price levels,” he says, “but it may be a wise move, especially if you can lock-in a profit by forward selling the crop.”
Meanwhile, Laffey was expecting lower yields for his 2008 crop following the spring and summer's raging rainfall. He felt fortunate that he hadn't sold much of his soybeans before the latest rally in prices.
First, he was concerned about having enough bushels to cover contracted grain. And second, there were more opportunities to secure higher prices.
“For 2009, we started making small sales in December 2007,” says Laffey. “We used the philosophy that you can't hit a home run on every bushel. It's all about the average…whether it's for this year or next.”