Another year has passed and what a year it was. Now is a good time to review the mistakes of the past year and make some resolutions for this year.
I WILL HAVE a plan. Bull markets are hard on my proactive approach to grain marketing, and the two years preceding last summer were one heck of a bull market. Who needs a marketing plan with $4 cash corn and $10 cash soybeans, plus prices getting stronger by the week? Last winter, I spoke to many different groups who would laugh at my jokes and nod politely at my advice. However, they knew it was people like me — using a marketing plan — who were left with that “too early and too cheap” feeling about grain sales.
The market today is very different, and the new tone is reminding producers of the advantages of having a marketing plan. In flat or down markets, the proactive approach is two thumbs-up.
Markets will find a way to rally in the worst of years. Will you be ready to price grain when you reach your price objective? Do you have a price objective? Do you have a plan?
I WILL NOT hold unpriced grain in storage after July 1 (the 11th commandment of grain marketing). Many producers hold a sizable portion of their 2008 corn and soybean crops in storage. Use the 11th commandment as a good reminder of just how long you should hold out for better prices.
I know there are exceptions to the 11th commandment — years when grain prices at harvest are higher than prices at the end of June (see soybeans in 2007). However, exceptional years do not change facts: Since 1990, the cash prices of corn and soybeans average 25¢ and 50¢ lower at harvest, respectively, than they do on July 1.
This past year offered a very painful reminder of the need to stick to this resolution. In southern Minnesota, cash corn prices peaked at $7/bu. at the end of June; by harvest they had lost half their value. Cash soybean prices reached $15.50 in early July, and by mid-October they were worth $8/bu. Selling old-crop grain by the end of June would have saved a lot of money.
I WILL EXPLORE the direct use of futures contracts. Who knew that something as staid and old-fashioned as a simple forward contract could be so dangerous? The ethanol debacle is hurting more people than just direct investors. We are hearing from too many producers who made great forward sales of $5 and $6 corn (they had a plan) only to have bankruptcy wipe away their contracts. Unfortunately, I believe we will hear many more of these stories in the months ahead.
Could these problems be avoided? Yes. Open a brokerage account and sell futures directly, instead of forward contracting. The CBOT is financially solid and you gain the additional advantage of being able to deliver your grain to the market with the best basis. That might be an ethanol plant, a nearby hog operation or a large terminal elevator.
There is the challenge of the dreaded margin calls. I have discussed this challenge with a number of lenders and they all agree: Provide a marketing plan and a legitimate hedge, and they'll work with customers to see that those margin calls are met. If you still have no stomach for margin calls, buying puts is an expensive but viable alternative to selling futures.
2009 NEW YEAR RESOLUTIONS
- I will have a marketing plan (and use it!)
- I will not hold unpriced grain in storage after July 1
- I will explore the direct use of futures contracts
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].