What is in this article?:
- He Uses All The Marketing Tools | Nebraskan Uses Cash Sales, Futures, Options To Manage Risk
- The true hedge
Randy Jacobitz’ corn production includes popcorn for movie theaters. That’s only fitting, since like a Hollywood director, he depends on a cast of risk-management players to ensure his corn and bean prices are a hit.
Yellow and white corn are bigger stars in his diversified corn program. Soybeans make up only about 25% of his total production. With price volatility never before seen, the Kenesaw, NE, grower combines cash sales, futures contracts and options to manage his marketing.
“I’m listening to a marketing advisor more than I did before,” Jacobitz says, describing how his marketing program’s changed. “I need the outside expertise (Roach Ag Marketing). We have ‘selling sessions’ from January through July to hopefully sell 70% of my expected production.”
That’s usually a good strategy, says Chad Hart, Iowa State University Extension grain marketing economist, noting that more growers are making early sales to help cover input costs for the current and following years. “They’re marketing a little to cover land rent, fertilizer and other input costs,” he says. “That’s been a good plan, especially if you look at this year.
“People making moves last April and June saw good prices. Given the volatility, if you can lock at a price preharvest that you know will cover your costs, it takes the steam out of volatility,” says Hart.
In his early marketing, Jacobitz used more futures contracts. He didn’t set the basis with an elevator due to strong local ethanol-plant markets. “I sold December futures at about $5/bu. from March to June, then had some later futures sales in the $6.50 range,” he says.
“Basis is normally about 40¢ under (the futures price). But we expect it to narrow to 10¢ under or close to even. That’s when we’ll set the basis.”
He took a similar approach with soybean futures. “I made some November 2011 soybean sales at about $8.25 early and some at about $11 later on,” he says. He expected to harvest some beans for early delivery to soybean plants for a better basis, and then deliver the remainder to the elevator.
“Those early corn and soybean futures prices offered a good margin over my costs,” Jacobitz says, helping him cover early 2012 cash-rent needs.
To protect his futures positions against potential prices increases, Jacobitz bought call options. Increases in prices above his futures levels would create margin calls. However, call options could counter that.
“In March I bought some out-of-the-money $7.40 December calls,” he says. “That protects against an increase in futures prices and minimize margin calls.”
In discussing changes seen in marketing spectrums, Jacobitz says a separate margin account may be needed over and above an operational loan with a lender. “I haven’t set up a margin account,” he says.
Hart says most growers aren’t sold on options. “More people are looking at them, but not many are buying,” he says. “They see the high price tag.” That’s especially true for at-the-money put options, which normally cost 25-35¢/bu., or about $1,500/5,000-bu. corn contract.
“High options premium directly reflect price volatility,” Hart says. “I think we’ll see more growers use options in the future, but not now.”
Hart adds that growers can receive similar price protection by using RMA Revenue Protection (RP) insurance. “I’d say 90% of Iowa’s corn and soybeans are covered by RP,” he says. “But remember, RP insurance premiums go up and down with price volatility just like options premiums.”
Consider all marketing tools – cash forward contracts, futures, options and RP crop insurance – in corn and soybean marketing, Hart says.
“The markets are just not behaving like markets used to,” he concludes. “Growers recognize that seasonal marketing trends aren’t holding each year.
“More producers are creating an average price by spreading out marketing. They may market 10% one month and 10% the next, and so on. They don’t capture the highs, but don’t hit the lows.”