Pricing this year's crop before harvest is always a challenge. The 2010 crop is in our sights and it is not too early to start taking some shots. But doubts persist. “Shouldn't I wait for prices to rally a little higher? Maybe I should wait until spring. Prices are usually higher in the spring.”
I want to introduce you to the simplest of all preharvest marketing plans. This is an approach used by my celebrity producer Grandma, and her approach has proven to be remarkably effective over time.
Grandma prices 70% of her anticipated new-crop corn and soybeans in 10% monthly increments, starting in January and ending in July. Her level of preharvest pricing is consistent with her crop insurance coverage. She prices the remaining 30% of her production at harvest.
Does this simple approach work? Look at the accompanying table, where Grandma's simple approach is compared to Barney Binless. Barney is a celebrity producer who does not believe in preharvest marketing. He prices all of his grain in the fall — Barney represents a benchmark harvest price.
OVER THE PAST two decades, Grandma's simple approach to preharvest marketing beat the harvest price by an average of 20¢/bu. in corn and soybeans. Twenty cents per bushel on every bushel of corn and soybeans produced over the past 20 years is no small piece of change. This result is even more remarkable when we consider that Grandma is pricing 30% of her production at harvest, just like Barney.
Grandma's approach is not perfect. Results show that her price was better than the harvest price in about two-thirds of the years; i.e., Barney beat Grandma about one-third of the time. A closer examination of individual years (see celebrity producers at www.cffm.umn.edu/GrainMarketing) shows that Barney's margin of victory was a modest 12¢ or less in half of these years. But — and here's the “not easy” part of marketing — there are times when Grandma's simple approach fell short by a large margin. The most recent examples are 2006 in corn and 2007 in soybeans, when Barney's harvest price beat Grandma's by 37¢ and $1.20/bu., respectively.
WHAT MAKES GRANDMA'S plan so simple is that she takes action every month — regardless of the price level. Since 1990, there were many examples of Grandma pricing with December corn futures trading under $2.40, or a cash price less than $2/bu. I'm not very comfortable with this aspect of Grandma's approach. I think every producer should have a minimum price objective that is consistent with local production costs. Having said this, I have tried to improve Grandma's plan with the use of a minimum price and no luck — those low-priced sales were just as likely to be right as wrong.
Grandma has a simple an effective plan to price new-crop grain. How about you?
Ed Usset is a grain marketing specialist for the University of Minnesota Center for Farm Financial Management (CFFM). He can be reached at firstname.lastname@example.org.