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When locking in fertilizer prices, too many farmers don’t also lock in corn prices, even though fertilizer prices have consistently followed corn prices up and down. Lance Unger, Carlisle, Ind., takes a different approach. “It’s the only true hedge in the market,” he says.
Along with fertilizer, the Ungers lock in diesel early. “Welocked in diesel (in the spring), at about $3.20/gal., compared to about $3.80 orhigher later on,” he says. “That was through our co-op.
“We’re not fool proof,” he says. “We can lose money. It can be hard to haul $6 corn to the elevator when the price is $8. Also, with these high prices, some guys get short-sighted. They sit around and think grain prices are going higher. But they also paid high prices for fertilizer. If grain prices go down, they’re in trouble.”
“Don’t pull a VeraSun.” Illinois Extension Economist Scott Irwin’s warning is for growers who may teeter on economic catastrophe if they pay high prices for fertilizer or other inputs without matching them with corn or soybeans sales. His reference to the bankrupt biofuels company – which apparently failed to hedge against grain it purchased – illustrates the enormous financial risks farmers take. “The mistake you can’t afford to make is to lock in high input prices and not lock in corn prices,” Irwin stresses.
Too many farmers don’t follow through on both ends of the spectrum, even though fertilizer prices have consistently followed corn prices up and down since 2006, Irwin says.
Lance Unger, Carlisle, Ind., takes a different approach. He heeds that advice of Irwin and other farm-management specialists who recommend not doing one without the other.
“It’s the only true hedge in the market,” says Unger, 24, who farms with his father and mother, Del and Tammi. They work about 5,500 acres, 75% of which is in corn, with the remainder in winter wheat that’s double-cropped with corn or soybeans.
“Matching input purchases with corn sales insures that you’re likely going to make a profit and cover your risk,” he says. “It does no good to buy your inputs and not sell grain.”
In early September, with corn and soybean prices still at bin-busting levels and fertilizer costs below what they were last winter and in the spring, locking in both prices and inputs for 2013 production should have been in the plans for many growers, Irwin believes.
The latest budget forecasts by the University of Illinois farmdoc management program call for reasonable returns for corn and soybeans, even when using a medium of $6/bu. corn price and $12.50/bu. for beans. Irwin says that excluding land costs, returns are pegged at more than $650/acre for corn and $400/acre for soybeans across high-production areas of central Illinois. Similar returns should be expected for high-yielding areas in other Corn Belt regions, he says.
But if your budget is set and you’ve locked in your fertilizer costs without making sales – beware. Corn could easily turn tail and hit $4-$5 and slash your expected returns. “You’re setting yourself up for disaster.” Unger says.