SCENARIO 1: Early in the year, you put together a plan to price grain before harvest. Good pricing opportunities are plentiful and as harvest approaches, you find yourself with pricing commitments on 50% of your soybean crop and 70% of your corn crop. Every bushel priced early is profitable. There is one catch — harvest prices are even higher.
SCENARIO 2: A new year begins and a number of experts think the corn and soybean markets are oversold. You agree with the consensus so it's easy to put your preharvest pricing efforts on the back burner. (Besides, those early sales did you no favors last year.) As harvest approaches, those “oversold” market prices are now even lower — lower than anyone imagined nine months ago and 0well below your breakeven cost of production.
The first scenario reminds me of 2007 for corn and soybeans (with a repeat performance in soybeans last year). The market in 2007 dished out many early and profitable pricing opportunities, only to leave us with that “too early and too cheap” feeling in the first half of 2008. It reminded us that a bull market is the weak spot in a proactive approach to marketing.
The second scenario is the reality for too many producers this year. I am hearing many reports that producers were “under-contracted” as harvest began. What is Plan B for the farmer who invested $3.80/bu. for corn that is worth 50-80¢ less?
My book, “Grain Marketing is Simple,” outlines a proactive approach to marketing. I asked a good friend if he had read my book and he said, “Yes, and if not for your book, I would have never sold my $7 corn for $4 last year.” Ouch.
He went on to tell me about the corn he produced on a different farm located 50 miles farther north. He stubbornly waited for $7, but that market fell a few cents short. He sold that corn for $4, too. Sigh.
Selling too early and too cheap is frustrating, but you will survive. Selling at prices below your cost of production is not a recipe for survival over time. I prefer to be proactive and accept the risk of locking-up a smaller (but profitable) margin.
Corn prices have recovered from their early September lows. Soybean prices are also showing some life. I see opportunities to get started on 2010. Make a few sales and hope that a year from now the sale was too cheap. It beats the alternative.
2010 SOYBEAN MARKETING PLAN
(expected production of 25,000 bu. on my mythical farm)
Objective: Buy crop insurance to protect my production risk, and have 75% of my anticipated soybean crop (based on APH) priced by early June.
Price 2,500 bu. at $8.35 cash (c) price - $9.05 November futures (f) - using some form of fixed price contract: forward contract, HAT, sell futures.
Price 2,500 bu. at $8.85c/$9.55f, or by March 29, pricing tool to be determined (tbd).
Price 2,500 bu. at $9.35c/$10.05f, or by April 14, pricing tool tbd.
Price 2,500 bu. at $9.85c/$10.55f, or by April 28, pricing tool tbd.
Price 2,500 bu. at $10.35c/$11.05f, or by May 13, pricing tool tbd.
Price 2,500 bu. at $10.85c/$11.55f, or by May 27, pricing tool tbd.
Price my last 2,500 bu. at $11.35c/$12.05f, or by June 10, pricing tool tbd.
Plan starts on Jan. 1, 2010. Earlier sales will be made at a 35¢ premium to price targets noted above and will be limited to 10,000 bu. Ignore decision dates and make no sale if prices are lower than $8.35 local cash/$9.05 November futures. Exit all options positions (if any) by mid-September 2010.
Ed Usset is a grain marketing specialist for the University of Minnesota Center for Farm Financial Management (CFFM). He can be reached at [email protected].