Odds are good that you will see more money from the elevator and a lot less in the mailbox.
Last year's corn and soybean crops were easy to make money on because of “the three L's,” a farmer from central Illinois recently told me. He quickly explained: “The three L's were: a large crop, a large LDP (loan deficiency payment) from the government and a large carrying charge in the market,” he said. “This year, even though prices are higher, my income will likely be lower.”
As you begin harvest, most producers will have fewer bushels to work with. And unless corn prices collapse, odds are good that you will not be able to collect any LDP on corn.
Odds are also good that last year will represent the peak in government payments and that — in 2001 and 2002 — you will receive a lot more money from the elevator and a lot less in the mailbox. To stay profitable in this new era, you will need to do a better job of marketing.
Here are some changes for you to consider:
Unless the government makes major policy changes, all corn and soybean producers should look at the price zones they are in. Watch these zones not only for the crop you are harvesting, but also for the crop you will plant next spring. The charts help illustrate the facts below.
For December corn, $1.80-2.00/bu is the buy zone for livestock feeders and also a great level for corn farmers to employ strategies to lock in the LDP payment. The $2.60-2.80 futures price is the key zone to sell corn or lock in prices for future delivery.
For November soybeans, the $4.20-4.40 price level is the key level to lock in LDP payments. The topside of the zone is $5.50-5.90. That is a price level that will get your crop sold at loan level or higher. At that higher price level, you will be selling above the loan level. That should improve your profit outlook — as long as you have locked in the LDP when prices were low.
Be aware of the carrying charge. Corn farmers should check their current bids vs. Dec. 10 or March 10. The carry charge (price improvement) is likely to be about 20¢ into December and 30¢ out into March. While you'll incur some interest in carrying the crop out for 2-4 months, the interest cost is minimal vs. the return the market may offer.
Use your storage for corn. However, soybean farmers who check the cash bids out into Dec. 2001 and Jan.-March 2002 will see how little the market is offering you to hold onto your cash soybeans. Once you have locked in the LDP and pick up the post-harvest basis appreciation, turn your soybeans into cash. If the soybean market is not paying you to hold onto cash soybeans, maintain ownership with futures or call options.
Pick a profit objective where you are willing to sell your crop. With the four-year bear market ending in corn and soybeans, prices are likely to be more volatile in 2002. As a result, having a written plan in place is very important. Even more important is having the offers in place to execute the plan.
The Illinois farmer I mentioned above indicated that he had locked in a 28¢ LDP on his 2001 crop. To get the same profit level for his 2002 crop, he was going to attempt to sell his crop for a minimum 28¢/bu more this year. I have feeling that he will get the job done.
Alan Kluis is president of NorthStar Commodity Investment Co. If you have marketing questions or want more information, write: NorthStar, 1000 Piper Jaffray Plaza, 444 Cedar Ave., St. Paul, MN 55101; call: 800-345-7692 or e-mail: email@example.com.