October-November-December (O-N-D). That's long been staple for many growers eager to get their corn and soybeans sold and delivered at harvest. O-N-D delivery periods are only natural.
“Obviously, cash flow is needed,” says Darrel Good, University of Illinois grain marketing economist. “There's often not enough storage and/or growers don't want to pay storage rates.”
O-N-D delivery is certainly still viable. But when should the corn and beans be sold? Are seasonal price patterns still valid in determining when to sell?
Mark Miller, who farms and ranches with his sons Shane and Chris, North Platte, NE, has about 1,500 acres of row crops: 70% corn and 30% soybeans. “I forward contract with the elevator based off the futures market price and leave the margin calls up to them,” says Miller.
He contracted about 60% of his 2008 corn and nearly 90% of his beans O-N-D 2008 by May 1. “I try to deliver 90% in October and November,” he says. He has little on-farm storage.
The early forward contract corn sales were made on eight different occasions, ranging from $3.86/bu. last November to $5.78 in late April. His average was about $4.90 for the period. He was hoping to fill bids for $6 cash corn to put him at 75% sold.
Most of his bean sales were all made at $9.50/bu. late last fall (2007). Additional sales were made at $10.60 early in 2008.
THOSE SALES WERE virtual no-brainers at the time. “That's what I wanted for them,” says Miller, who never foresaw $13 or higher soybean futures or corn topping $6.
And, the early sales were made at harvest, when prices are traditionally weak due to a glut of supply. But Miller tapered off corn sales after seeing that demand would likely outpace supply.
“I can see a big jump in grain prices,” says Miller, confident that the other half of his corn and remainder of his beans will garner good prices.
Even though seasonal patterns have been altered by heavy investor futures trading and continued strong demand, an old fashioned weather market prevailed in the spring when cool and wet weather delayed corn planting by two to three weeks in many areas. December futures prices surged to $6.30-6.40. But factors other than weather also impacted prices.
“In the past, farmers tried to anticipate when prices would be higher, usually in the spring and summer, and get a lot of their corn or soybeans sold before the fall,” says Good. “Now, most people agree that there is a two-sided impact on prices.
“We have tight stocks and good demand (with ethanol added to livestock feeders), so the seasonal pattern doesn't just reflect the supply side of the equation any more. It's more of a random pattern than in the past,” he says.
“We can see a spike or decline at various times during the year, rather then spiking only during weather patterns.”
Miller makes a point to limit his early marketing to the amount of federal crop insurance he carries. “I figure what my yield guarantee is and take out the 75% revenue assurance level,” he says, admitting that marketing 90% of his beans was beyond his normal limit. “I try not to go over the yield guarantee in case I get hit with a hail storm.”
Due to revenue insurance, Good says more growers feel comfortable not pricing much of their expected production early. Revenue insurance is similar to having a put option in place to set a floor.
“There is less urgency to price early before harvest if prices are below the spring guarantee,” says the economist. “But I don't like the market strategy of selling at prices below the guarantee.”
Widening basis levels that coincide with higher futures prices play a factor in when growers make sales for O-N-D. Basis levels are wider in the earlier months, but narrow at harvest.
For example, last year in Illinois December corn basis levels were 30-60¢ under in the summer through mid-October, according to a basis chart at www.farmdoc.uiuc.edu/marketing/basis/BasisTableChart_2008.asp. But by about Dec. 1, the basis had narrowed from 5¢ under to 25¢ under.
ALSO, NOVEMBER SOYBEAN basis levels were 60¢-$1.25 under from mid-summer through early October. But it narrowed from 20¢ under to 50¢ under by about Nov. 1.
Even though there wasn't total convergence of basis and futures, basis did narrow a lot at the same time prices were fairly strong. That means early forward contracts based off strong futures prices could be offset by a wider basis.
So early contracts with the elevator, or using futures or options to cover corn or beans slated for O-N-D, could prove profitable. But early marketing into the O-N-D period when basis is often narrow early in the year could also prove profitable. That's if you don't need the year-end cash flow or have plenty of storage capabilities.
“Marketing is always difficult,” says Miller. “You just have to determine what is a good enough profit for you and go with it.”
The Illinois farmdoc Web site's (www.farmdoc.uiuc.edu) “Fast Tool” on “Quick Cash Flow Projections” helps determine financial needs before making marketing decisions by examining: revenue expectations the coming year, projected quarterly expenses, what will happen if cash flow deficits occur causing the borrowing from an operating loan, how much operating capital will be needed for the next year, how cash flow will be impacted by changes in yield and sale price and cost assumptions.