Preharvest pricing of the 2010 crop remains on my mind. In my last column, I introduced you to Grandma, a celebrity producer with a very simple and effective plan to price grain before harvest. Today we meet Terry Timer, who has a slightly different approach to new-crop pricing that is also very effective.
To refresh your memory, Grandma prices 70% of her anticipated new-crop corn and soybeans in 10% monthly increments, starting in January and ending in July.
Terry Timer prices 75% of her anticipated new crop in 25% monthly increments, starting in March and ending in May. Many readers may think Terry's approach sounds like Grandma's, with Grandma's seven-month pricing window simply compressed into three months. However, there is one important distinction: Unlike Grandma, Terry will not make new-crop sales at any price. Terry has a minimum price objective for new-crop corn and soybeans that is consistent with her break-even cost of production.
Terry's approach is a focused attempt to profit from a well-established seasonal trend in grain markets — the tendency for new-crop corn and soybean futures to trend lower from planting season to harvest (see my Late February 2009 column, “Hail the Too-Too Season,”).
Grandma's simple approach to preharvest marketing beat the harvest price by an average of 20¢/bu. On average, Terry Timer's approach is even better. Since 1990, Terry's approach beat the harvest price by 22¢ and 26¢/bu. in corn and soybeans, respectively.
What makes Terry Timer's results so remarkable is the fact that there were four years in corn and three years in soybeans when she did no preharvest pricing of grain because prices were below her minimum objective. In these years, Terry received the same price as Barney because she priced her grain at harvest. In addition, in 2001 and 2003 she priced just 25% of her corn crop because the market offered few opportunities to price grain above her minimum objective (see all celebrity producer results at www.cffm.umn.edu/GrainMarketing). Again, any grain not priced early is priced at the harvest price, just like Barney.
Terry's minimum price objective adds discipline to her aggressive desire to price grain before harvest, and there are several examples where it served her well. In spring 2002, for example, new-crop December corn was trading near $2.20/bu. and November soybeans were close to $4.60. In both cases, I cautioned against early sales at levels that were clearly below production costs.
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].
TERRY TIMER VS. GRANDMA VS. BARNEY BINLESS 1990-2009 AVERAGE*
Terry sells 25% increments in March, April and May if new-crop futures (December corn and November soybeans) are above her breakeven cost of production. She is willing to make catch-up sales until the end of May, but makes no sales after May 31. Her price is based on new-crop futures (December corn and November soybeans) on the Tuesday between the 4th and 10th of each month, adjusted for the actual harvest basis on the Friday between Oct. 12 and 18. All remaining unpriced bushels are priced at harvest, at the same price received by Barney.
Grandma prices 70% of her anticipated new crop each month in 10% increments from January through July. Her price is based on new-crop futures on the Tuesday between the 4th and 10th of each month, adjusted for the actual harvest basis on the Friday between Oct. 12 and 18. The remaining 30% of her crop is priced at harvest, at the same price received by Barney.
Barney Binless represents the harvest price in mid-October. His price is the cash price on the Friday between Oct. 12 and 18. 7
*CASH CORN AND SOYBEAN PRICES IN SOUTHWESTERN MINNESOTA