Corn producers started the new year with prices too low and too much in the bin. Corn at $4 is a problem but, to be fair, this is not a problem that started at harvest. The roots of this problem go back a full year, when too many producers decided not to play the pre-harvest pricing game. As I roll out my pre-harvest marketing plans for 2014, let’s review them with a commitment to not make the same mistake as last year.
My pre-harvest marketing plans are shown. They are simple and consist of two key elements - price targets and decision dates. They also involve a tactical question; Which pricing tool should I use?
My price targets begin with a minimum price objective that is consistent with my estimated break-even cost of production in 2014. I’m using minimum prices of $4.90 cash/$5.40 Dec’14 futures in corn, and $11.00 cash /11.60 Nov’14 futures in soybeans. The implied basis levels of 50 cents under in corn and 60 cents under in soybeans are consistent with southern Minnesota levels. You should adapt minimum prices (i.e., production cost estimates) and basis for your area. On the high side, price targets reach $7.40 and $15.20, respectively, in Dec’14 corn and Nov’14 soybean futures. Do these prices look too ambitious? Don’t worry – decision dates have a way of making my maximum price targets less important.
In my plan, decision dates are dates when I price grain, regardless of whether or not I reached a price target, as long as the price is higher than my minimum. Decision dates transform a marketing plan from a wish list to a real plan for action. I cluster decision dates in the March – June time period because spring is often a good time to price grain. But don’t forget your minimum price! I will ignore decision dates if prices are lower than $4.90 cash/$5.40 Dec’14 futures in corn, or $11.00 cash/$11.60 Nov’14 futures in soybeans.
Now, about that tactical question concerning which pricing tool – forward, futures or options contract – to use. This is really a question about basis and “upside” potential. If your elevator is bidding a solid and competitive basis for new-crop delivery, the forward contract is a good pricing alternative. If not, futures and HTA contracts buy time for the basis to improve. If you’re willing to pay the cost, options offer upside potential. The high cost of options is the main reason I prefer futures or forward contracts, particularly early in the plan when price targets are close to break-even levels.
If you adopt a plan similar to mine, you know that the market is offering you a chance to start pricing 2014 soybeans, while Dec’14 corn futures are 60-80 cents shy of my $5.40 per bushel minimum. Sometimes good marketing demands patience.
My pre-harvest marketing plan is not a plan to sell the high, and it won’t eliminate the anxiety that comes with pricing decisions. My approach is an attempt to find a good average price. It also helps avoid this year’s problem of prices too low and too much unpriced grain in the bin.