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Don't try to outguess markets
Kip Tom doesn’t try to outguess corn and soybean markets. He looks at the rate of return each provides for his 16,000 acres of production in Indiana and another 4,000 in Argentina.
“We’re producing good crops on good soils using good genetics, traits and technologies,” says Tom of Leesburg, IN. “If I have a known quantity and can manage costs, I can hopefully protect margins. We’ve been transitioning our market plans toward return on investment.”
Tom leans toward using options “to protect a floor and still have upside potential,” he says. “We’re also looking to aggressively sell for 2011, 2012 and 2013.”
For 2010 and 2011, he has established both corn and soybean “fences” to leave solid upside potential. “We have corn floor prices protected at about $4.75/bu. using put options,” he says. “For the upside, we’ve fenced in a trading range by selling $6 call options. We feel we can make money in that range.”
With options spreads, he can lower the cost of put option price protection by selling out-of-money call options. The trades are for various months to handle staggered sales into 2011 and beyond. For beans, “we have fences using $9.50/bu. puts and $11.50 calls.”
Accumulator contracts are also in Tom’s strategy of making aggressive sales. (See related story, page xx.) With accumulators, he commits the delivery of a certain number of bushels over a long time horizon at a price usually above a set futures price. It gets back to Tom knowing his production costs and determining what level of margin he wants to obtain.
“We look at marketing crops several ways,” he points out. “First the price, then basis, then the spreads in the market. We try to maximize all three. In a year like this, with wide basis, we’re storing the crops (to make sales when the basis narrows). We’ve increased our storage capacity to 2.7 million bushels.”
Tom is “bullish on agriculture” across the board. He expects increased demand for corn and soybeans, thanks to world population gains and higher living standards in developing countries. “We see great opportunities to market our products,” he says. “Producers will be asked to do more with less.
“U.S. farmers will find a way to meet the demands of the market. “That’s why demand for corn acres will increase across the Midwest. More wheat has been planted due to higher prices and good insurance protection for that crop.
“So there could be a shortage of corn acres. Some are thinking 90-93 million acres of corn. I don’t think that’s enough as we look into 2011 and 2012.” He also sees more investment in farmland by those outside agriculture.
Tom believes markets for U.S. corn and beans would be even higher if not for government trade policy. “We have great markets at our fingertips (like through the Colombia free-trade agreement), but we’re not seeing them because of government inaction. Those are things that can influence markets.
“Ethanol should remain as a strong market for corn.”