With new-crop corn and soybean futures markets priced for profit, farmer Rod Pierce takes full advantage of revenue crop insurance. He makes substantial grain sales in addition to guaranteeing income on 75-85% of his production.
Pierce, who raises corn and soybeans near Woodward, Iowa, doesn’t see much risk in taking a profit when it’s on the table – especially when insurance covers yields and a strong price. Neither should other growers who can capitalize on solid grain prices following the 2012 drought, says Steve Johnson, Iowa State University Extension farm management specialist.
March 15 is the deadline for Revenue Protection insurance signup. Corn and soybean payment prices are based on the November 2013 soybean futures price and the December 2013 corn futures price. In mid-January, December corn was in the $5.80-6/bu. range, with November beans in the $12.70-13/bu. range. Both are above typical Corn Belt breakeven levels, says Johnson.
Pierce takes Johnson’s advice that farmers shouldn’t be afraid to sell up to their revenue protection insurance guarantee preharvest if grain prices can deliver a profit. “This advice paid big dividends for me last August,” Pierce says. “It’s hard to sell when you’re not sure of the bushels you’ll produce. It’s easier knowing that federal crop insurance will cover your sales if needed.”
Pierce plants his acres to 90% corn and 10% soybeans. He has 250,000 bu. in on-farm-storage capacity, which facilitates periodic sales using hedge-to-arrive (HTA) contracts and futures. He markets most corn to a regional Louis Dreyfus ethanol plant. He also grows and markets Pioneer Hi-Bred seed.
Using revenue protection (RP) insurance, he takes advantage of strong prices, even if production is questioned in the middle of a drought. “I analyze the different RP options once the spring price is set, then pick the one I feel gives the best value,” Pierce says. “With the extreme dry subsoil this winter, I will most likely use the 85% coverage level with the trend-adjusted provision. It was a great deal for our operation in 2012. It helped bring our average APH to 198 bu./acre.”
With the 198/bu., his RP coverage will likely provide a price floor in the $5.80-6 range for 85% of his projected yield. “That’s a great place to start marketing from,” he says.
Sell beans in winter
Corn sales more than a year in advance are common in Pierce’s marketing plan, and he usually starts making bean sales in the winter. “I sold 20% of my expected corn crop last August at $6.50,” he says, adding that he tries to have 50-75% of corn and beans sold ahead of harvest. “About 10% was in HTAs to the ethanol plant and 10% was off a futures position.
“With uncertain soil moisture conditions, I will probably use more futures this season,” he says. “If the market is offering a good profit per acre, we will sell up to a year ahead.”
Based on typical 2013 Corn Belt corn and soybean production budgets, Johnson recommends growers sell up to 30% of their corn and beans early. Early sale prices remain strong, even though cash corn prices of $6.80-8 are projected for the marketing year, based on carryover stocks of only 602 million bushels, which is a 17-year low. USDA projects soybean prices in the $13.50-15 range, based largely on carryover stocks of 135 million bushels.
“We assumed a short 2012 crop would have a long tail with lower prices for the 2013 crop,” Johnson says, adding that strategies like Pierce’s give growers a leg up on new crop marketing.
A projection by University of Illinois’ farmdoc further illustrates good news for farmers on a typical Midwestern farm. The scenario is based on a fictional 1,200-acre farm, with average yields of 187 bu./acre for corn and 54 bu. for soybeans. About 120 acres are owned, 360 are share-rented and 720 acres cash rented.
These projections show profit is there for a normal year and harvest-time delivery, with the profit depending on price levels:
- For $5.80 corn and $12.40 soybeans, projected net income is $291,000.
- For $5.40 corn and $11.80 soybeans, projected net income is $229,000.
- For $4.90 corn and $11.10 soybeans, projected net income is $153,000.
- For $4.50 corn and $10.50 soybeans, projected net income of $85,000.
With $5.80-$6 corn and $12.70-$13 beans, growers should have solid floor prices to make sales now, says Johnson. By securing base crop insurance prices close to those levels on up 85% of their acres, they can virtually hedge in a profit with less risk involved, he adds. “Making early sales from late winter into the summer months will help growers get a head start on covering cash-flow needs for next fall and winter, and avoid commercial storage costs.”
Shoot for some September sales
Johnson suggests farmers shoot for some earlier harvested corn or soybeans and better basis at delivery, a strategy that paid off in 2012. He recommends using futures or HTA contracts, which allow basis to be set later. “I expect extremely attractive basis opportunities for early harvested corn and soybeans again in 2013, so leave the basis open for now,” he advises.
“Look at the possibility of harvesting for the first half September delivery to capture that narrow basis,” he says. “You might have to fix that basis early in the summer months before the final size of the 2013 crops are known.”
Pierce uses Russell Consulting Group, Panora, Iowa, to help him analyze the farm’s revenue potential and set goals. “They help me pick price targets for placing sell orders,” he says. “They are big on scale-up selling on rallies.”
His risk management also includes matching corn sales with fertilizer purchases. “If I prepay fertilizer in the summer, I sell enough corn at that time to cover the purchase,” he says. “The fertilizer industry uses the corn/fertilizer ratio to price their products. I feel it is important to pair the two together.”