Doug Brown practices what he preaches in marketing his corn.
The McCook, NE, co-op grain merchandiser uses many of the same strategies he recommends for clients in his own farm's marketing plan. And he pulls the trigger on bulk input purchases as quickly as he does on a solid corn price.
Brown farms in northwest Kansas, but he's also grain originator/operations manager at Frenchman Valley Co-op, a half-hour away. Headquartered in Imperial, NE, the co-op has 10 locations.
Many growers turn to Brown for marketing advice. He often offers a strategy similar to one he has in mind for his own operation. For instance, late last summer he took an aggressive approach to making late-2007 corn sales.
“I forward contracted part of my corn with two area feedlots for July delivery,” he says. “The corn was priced at $4.15/bu., including a 4¢-under basis.”
The strategy didn't stop there. “When I price corn, I then buy a call option to protect the upside in the event of a price increase,” he says, noting that the calls are usually out of the money to hold down the cost of price protection.
To cover the feedlot sales, he bought $4 out-of-the-money July 2008 calls at a 15¢/bu. premium. As corn prices increase, so will his call options value. He can capture profits over the $4.15 contract price.
Brown never lets an option expire worthless, he says. “If it looks like an options trade is going the wrong way, I'll take a beating and get out of it.”
But even if he loses because a call option price decreases, he still has the corn locked in at the forward-contract price. “When I'm trading grain, I might get in or out of the market two or three times,” he says. “I don't feel like that's speculating, because it all goes toward the profit of my grain sales.”
CROP INSURANCE PLAYS a big part in his farming operation to help protect against a failed or damaged crop. “And the options strategies are just like insurance, except they cover your price, not your production,” he says.
Brown doesn't prefer using straight futures in his hedging program. “I don't like having to come up with margin call money,” he says, adding that with forward contracts, he can still take advantage of the futures price.
However, he monitors futures prices with virtually a ticker's click during trading hours and makes sure co-op customers know if there's a good deal on the table.
“The majority of the growers who use a marketing plan count on forward contracting (with the elevator) as the No. 1 tool,” he says. “They usually make the trade and forget about it. They keep their marketing simple.”
Several growers locked in their 2008 corn in late fall at a price near $4 cash, using a basis of about 32¢ under December 2008 futures. Brown lays out a call options plan similar to the one used to help them take advantage of price increases.
Richard Brock, president of Brock Associates and market analyst for Corn & Soybean Digest, says such strategies have been successful with the surge in corn prices. But that strategy may not be as successful in 2008.
“There's been nothing wrong with that strategy,” says Brock, whose market commentary is featured at www.cornandsoybeandigest.com. “Obviously it has worked well in the last two years because of the major bull market in corn.
“I doubt that such a consistent trend will continue in the future because of the even higher prices we're seeing for corn. That lessens the continued success of that kind of strategy,” Brock says.
Brown knows that marketing strategies must change with the changes in price trends. In addition, he counts on crop input price management to also enhance his bottom line.
“I try to lock in my fertilizer for corn and wheat,” he says. “I top-dress wheat with nitrogen and got about 30% of it locked in at $340/ton. If it isn't used for wheat, I can use it for my corn. And I can always sell it for that, or a better price, if I don't need it.”
Other inputs secured early by Brown include farm diesel bought at $2.32/gal. and propane locked in at $1.37 several months before the regional propane price hit nearly $2/gal.
“If I can, I lock in all of the variable inputs as soon as possible,” he says.
CORN PRICES HAD received a nice bump as they entered the new year, thanks largely to stronger basis levels. From late October to about Jan. 1, the corn basis improved by 20¢/bu. in many areas and more than 30¢/bu. in others, according to Cash Grain Bids, Inc., Bozeman, MT.
Reduced river barge rates helped to improve basis. In early fall 2007, barge rates from St. Louis to the Gulf were $1/bu. — close to the post-Hurricane Katrina level. But by year's end they were about 35¢/bu. — a 65¢ swing. (Soybean basis had improved by 30-40¢.)
Corn futures prices were in the $4.70-4.90 range as the year started. Those price moves in basis and cheaper barge rates have made grain pricing more attractive.
Brown says his work as a grain marketer helps him with his own farm operation. “I'm always aware of what the markets are doing,” he says. “That usually helps me do a better job of marketing my own corn and wheat.”
He would like to see more growers in his co-op and others become better marketers and take advantage of opportunities to better their price.
“Unfortunately, no more than 50% of the growers have a marketing plan in place,” says Brown, who hopes to improve that number by better educating growers on the benefits of disciplined marketing.
“There are still too many producers who don't expand their marketing strategies,” he says. “They market ‘just the way dad did it.’ But there are too many opportunities throughout the year to add to the price they receive for grain. We try to help growers take advantage of those opportunities.”