With an average price swing of up to 20¢ a day in corn futures, getting the 2007 crop marketed has been a chore for Ross Porter, his son, Curt, and other growers.
But there has been no hurry.
And with projections of higher prices, Ross was satisfied early on with 40% of his crop forward contracted with a local ethanol plant for about $3-4/bu.
Another 25% was protected by $3.50 December put options. “That has provided us with a strong floor price and left the upside open for rallies,” says Ross, who farms near Harris, KS, southwest of Kansas City.
Price protection insurance may be just as important as finding the right spot to pull the trigger on futures or options sales, adds Kansas State University Extension economist Art Barnaby. “This is the most price risk I've seen in 30 years,” he says. “I recommend that growers use RA/HP (Revenue Assurance/Harvest Protection).”
The Porters, Barnaby and most others with their finger on corn production and marketing say that potential rallies can likely be described as “not if, but when they will come.” Analysts Corn-Belt-wide say tight '07 supplies coupled with stronger demand could open the door for freakish prices.
Much of Porter's marketing is based on historical crop yields recorded at the county level. “Based on our average crop insurance yields, we had about 40% of our estimated bushels for '07 sold up to $4/bu,” says Porter, who counts on a marketing service, Hurley & Associates, to help him through pricing decisions.
Those sales were made in January through April. His initial '07 marketing began last fall when December '07 futures were in the $3.20 range.
“We bought $3.50 puts on about 25% of our estimated yield,” he says, noting that fewer people figured corn would shoot past $4, even though the ethanol rally was underway.
They weren't in a big hurry to get more corn sold in early summer, again because of the higher price forecasts. “We look to have scale-up sales when cash markets are above $4,” says Curt Porter. “If prices approach $5, we'll likely have very little corn that is not priced at harvest.”
The crop and revenue insurance facet is a major part of the Porters' marketing plan. They depend on the government's RA program with an added clause to cover a run-up in prices.
“We have RA on corn and soybeans and have it insured at the 70% level,” says Curt. “We also have the HP coverage.”
With an average county yield of about 90 bu./acre, the RA/HP cost was about $15/acre for the 70% coverage level. It was based on the $4 futures price. “We know that prices could easily go much higher,” says Curt, whose average yield is about 110 bu./acre. “The HP coverage will enable us to take advantage of any price increases.”
The University of Illinois farmdoc Web site has a section on estimated crop insurance premiums and other price levels for corn, soybeans and other crops (go to www.farmdoc.uiuc.edu/cropins/cropinstoolsmain.asp?num=4 and follow a few simple steps to find such information in one of 13 Corn Belt states).
In looking at Anderson County, KS, the Porters' location, the 70% coverage level for $4 corn futures drops to about $12 for 65% coverage. But it jumps to about $22/acre for 75% coverage and $32 for 80% coverage.
“Every year we look at the cost of coverage to see if we can justify increasing it,” says Curt. “It usually doesn't pencil out.”
K-State's Barnaby says each grower should measure the level of price protection he can justify for his operation. And with the volatile situation facing corn, he highly recommends the RA/HP coverage to help protect against a production shortfall.
“Five-dollar new-crop corn would not surprise me,” says Barnaby. “But are you willing to price at that? The concern is always what if you hedge or contract the crop and cannot produce it due to weather.
“Then you'll owe margin calls and don't have bushels to sell on the cash market. That's why you need additional dollars,” he says.
The RA/HP insurance goes over and above Crop Revenue Coverage (CRC), which has a $1.50/bu. limit on price increases that are covered.
“In the past, you could count on CRC to replace any lost insurable production,” says Barnaby. “However, with the increased volatility, it's possible for corn prices to exceed the $1.50 CRC price limit move. RA/HP has no price limit.”
Barnaby, who has assisted in writing federal crop revenue insurance programs for more than 20 years, says that with the new types of price insurance, growers can have more freedom and confidence in multi-year marketing.
“Once you get into that mindset that ‘I know I will have inventory (through insurance) this year, '08 and '09,’ if the price is right you can sell, knowing that when you get into '09, you will have bushels or enough insurance to replace it,” he adds.
In addition, he says, if growers are not sure about the level of coverage to purchase and the price goes lower, they might consider “increasing coverage and lowering the deductible.”
One of Barnaby's K-State colleagues, Mike Woolverton, Extension grain market economist, says a put option strategy, or one that allows for a grower to take advantage of price increases, may work well for this year and into '08.
“I'm concerned about corn yields this year, due to later-planted crops,” he says. “We probably won't see the average yields projected by USDA. Plus, with a low carryover, we will drop to a four-week supply of corn just before harvest.
“The stage is set to see some price spikes. Growers need to leave the upside open and lock in the spikes,” he says.
The Porters have that strategy in mind to accompany their early futures trades, price insurance the put options.
“If we saw we were going to have a better corn crop, yields of 120-130 bu. after the good rains we had in late spring and early summer, we might have looked at more puts to give us a price floor and let us enjoy higher prices if they came,” says Curt.
Ross adds that more upswings in prices will open the door to '08 and even '09 sales. “If we see much higher than $4, we will make some '08 sales and maybe even further out,” he says.