High prices and drought two years out of the last three has Dick Wittman, Culdesac, ID, farmer and ag consultant, looking hard at marketing to protect the price on what he does grow.
“There's long-term risk in locking input costs with no price protection,” he says. Conversely, he adds, if you're locking in a selling price, it makes sense to establish your margin by purchasing inputs on the same bushels.
For wheat farmers with a crop to sell, 2007 was a bonanza. For those who ended up with a short crop due to drought, it was like watching the other team score points while you sit on the bench.
In Wittman's part of the world, the Pacific Northwest, above-average yields for this year aren't likely under the current moisture conditions. “We're way behind,” Wittman says. “We've got a lot of catching up to do. You can do everything right, but if it doesn't rain, you're toast.” Whole wheat toast, one would assume.
That puts Wittman in a mood to buy crop insurance. “It's a no brainer,” he says. “With an 85% guarantee and a high actual production history, it's a cheap investment. A farmer in this area with a 90-bu. yield insured at the 85% level and a $6.23 insurance price can gross $477/acre. It used to be you'd sell 80 bu. at $3/bu. So you've got twice the revenue guaranteed. Isn't that worth the $20-25/acre it costs for insurance?”
WITTMAN ENCOURAGES farmers to use pricing tools to lock 40-50% of their production. “You've got plenty of choices. Forward contracts, futures, hedge-to-arrive, put or call options,” he says.
The volatile weather and markets of 2007 have caused a culture change in farmers' attitudes toward marketing, according to Devin Schierling, grain marketing manager for Team Marketing Alliance (TMA), Moundridge, KS, the marketing arm of four central-Kansas co-ops. “More guys are willing to invest money to stay in the market and take advantage of its volatility,” Schierling says.
Central Kansas wheat growers had a tough year in 2007. Early markets of $4/bu. had farmers forward contracting wheat before a late frost reduced yields to 15 bu./acre or less. As their crop crashed, they watched the market reach $10/bu. by December. Crop insurance protected many of the bushels. Other farmers found themselves rolling contracts into the 2008 season with a keener appreciation for sound marketing.
Most of the farmers forward marketing grain through TMA for 2008 use one of three programs, according to Schierling. “For our smaller, more conservative growers we recommend an incremental, scaled-up selling approach,” he says. “They might sell as little as 500-1,000-bu. lots each time they can add another 20¢/bu. to their selling price,” he says.
Farmers who had favored forward contracts are choosing TMA's put strategy for marketing. “We've been buying puts at $8 for 75¢/bu., so they're guaranteed $7.25, no matter where the market ends up,” he says. “I'd guess close to 70% of our customers who want to forward price grain are using this strategy.”
GROWERS INTERESTED IN a harvest delivery contract can choose TMA's floored average contract. The market plan sets a floor cash price for harvest delivery and allows the grower to establish a selling window to capture better markets. “A common window is Jan. 2 through the middle of May,” Schierling explains. “If the average selling price — based on the close each day — is more than the guaranteed harvest delivery price, the grower gets the difference. It's an options-based program that costs about 40¢/bu. to participate in.”
Regardless of the program growers choose, TMA recommends that they not sell more grain than they have insured. As 2007 proved to so many growers, that can result in a meltdown.