There's a 40+ year age difference between Ron Deinert and Matt Frew. But the eastern Nebraska growers have a lot in common when it comes to marketing their corn and soybeans. They cover their risk using various marketing tools and don't mind taking a few chances.
Deinert, 68, and his son Chad farm at Emerald, NE. Frew, 25, is in operation with his father Jim and uncle Rich near Dorchester, NE. Both take marketing as seriously as producing the highest yields. Getting their 2010 corn and beans marketed early may mean preplanting moves on one crop and postharvest sales on the other — or a combination of both.
“We try to get 50% of our corn locked in by January,” says Deinert. “We also get some of our beans sold when we can.”
Some of the Frews' 2010 corn was marketed before they were into the 2009 harvest, says Frew. “It was a combination of elevator sales, futures and options.”
Frew's operation is about two-thirds corn, one-third soybeans. He began learning about options while still in college. “My dad introduced me to them and I had some ag econ courses at school,” he says.
“I bought a small farm about two years ago and use various marketing tools to secure my income to make the payments on it. And if you do your marketing right, you can ‘get a raise.’”
DEINERT HAS BEEN using futures and options over 20 years. He takes a simple approach to using these marketing tools, a subject many feel is complex. “If you consider it the same as selling to the local elevator the day you sell the futures, you've sold the grain, only without setting the basis,” he says.
A semi-stagnant corn market had the Deinerts holding off on any serious 2010 corn sales moves late last year. “We feel like $4.75 futures is a good place to get some strong sales made,” says Deinert. He was hoping there would be rallies toward that figure after December 2010 futures lingered in the $4.25 range for more than a month. However, the situation may warrant making sales at the $4.25-4.50 range.
Plus, the Environmental Protection Agency's delay until mid-2010 of its decision to increase the ethanol blend level from E-10 to E-15 could also enhance markets as the decision nears.
Frew's early 2010 sales were first made in the summer. He contracted to deliver corn for $4 after the 2010 harvest. There were also December 2010 $3.80 puts bought last July and $3.50 puts in October.
“The options provide an opportunity to manage the price and provide an out if you're wrong,” says Doug Lewis, Frew's broker/consultant at Farmers Cooperative in Dorchester. He adds that Frew also established a “bull-call spread to increase the marketing window.” The spread involved buying $3.90 calls and selling $5 calls.
“We're looking for additional sales in the $4-4.40 range, which will also be protected by options,” says Frew.
“We want to get the first third of our corn protected the first half of the year with either puts or calls. The other two-thirds are usually stored on-farm for later sales the following year. We can often obtain a better basis when the previous year's crop begins to run out at the elevator.”
FOR LAST YEAR'S (2009) corn marketing, Frew followed such a strategy. “We had some $3.70 March 2010 puts that were put in place last summer (when corn prices were under $4 for a long stretch),” he says. “When the market rallied higher in the fall, we converted the puts to $4.40 March 2010 calls. The conversion cost was about 15¢/bu.”
The corn had been stored since harvest for later sales in the $3.70-4 range as the pipeline emptied. “The $4.40 calls give us protection against price increases on that corn,” says Frew. “We can take profits from the calls in a price rally.”
Deinert started making 2009 corn sales in January 2009. Sales continued through May and June. “We used December 2009 corn futures and wound up with an average price of about $4.25 on the board,” he says.
“We also used a three-way options spread that helped us obtain some ‘cheap insurance’ against a major drop in prices. We bought $4 December 2009 puts, then sold some $3 puts and sold $5.50 calls. The total cost was 7¢/bu. We had a $3-5.50 marketing window.”
Mark Welch, grain marketing economist with the Texas AgriLife Extension service at Texas A&M University, says growers should consider splitting their corn marketing into quarters geared toward seasonal price expectations.
His initial recommendations were for selling 25% of the crop between Feb. 10 and March 24, 25% between April 21 and June 16, 25% between July 10 and Aug. 9 and 25% between Sept. 28 and Oct. 18 (his Feedgrain Market Outlook newsletter is available online at http://tinyurl.com/feedgrains).
“Seasonal price tendencies provide the basis for my first preharvest sales in late February and early March,” says Welch, adding that he will use technical indicators for the remaining three pricing periods to recommend pricing triggers.
As in recent years, South America could dictate much about 2010 production and prices. “The degree to which a battle for acres between soybeans and corn drives prices higher depends on crop conditions this winter in South America,” says Welch. “As of the 2002-2003 marketing year, the combined soybean acreage in Brazil and Argentina has exceeded that of the U.S.”
Argentina was expected to plant a record number of soybean acres, with Brazil planting the most since 2004. “If these crops have normal or better yields, it will diminish the need for increased acres of soybeans in the U.S. this spring to meet growing demand,” says Welch.
“If the price for soybeans is softer with a large crop down south, we should see an increase in corn plantings, especially if nitrogen fertilizer prices are relatively low. Even with increasing corn demand, the price response could be tempered if corn plantings once again push the 90-million-acre level. South American crop potential may hold the key to profitable corn pricing opportunities this winter.”
Marketing plans are usually in the scope of Ed Usset, University of Minnesota Extension grain marketing economist. He writes preharvest and postharvest marketing plans to help provide growers with starting points for getting corn and soybeans sold. For 2010, he uses a simulated farm that produces 600 acres of corn and 530 acres of soybeans.
Before establishing any marketing moves, he encourages growers to buy crop insurance to cover production risk on 75% of the anticipated corn or bean crop.
USSET'S PREHARVEST CORN plan involves getting 65,000 bu. (from 90,000 bu. expected production) marketed by mid-summer. It begins with pricing 10,000 bu. at $3.65 cash (c) or $4.05 futures (f) using forward contracts, straight futures, options or hedge-to-arrives (HTA) by March 29, then an additional 10,000 bu. by April 14 for a $3.90 c or $4.30 f price.
An additional 5,000 bu. would be marketed at $4.40 c or $4.80 f by April 28; 10,000 bu. at $4.65 c or $5.15 f by May 13; 10,000 bu. at $4.90 c or $5.30 f by May 27; and 10,000 bu. at $5.15 c or $5.55 f by June 10.
“The pricing tools — either futures, options, HTAs or forward contracts — would be selected at the time of the sales,” says Usset. “All options positions would be exited by mid-September.”
While corn sales were made early, the Deinerts were not as eager to make early soybean sales. Chad Deinert works with his father on marketing. He was waiting on the November 2010 soybean futures price to hit $11 before starting sales. But after beans popped through $10 for several weeks, initial pricing levels were changed.
“We decided to go ahead and get some sold in the $10-10.50 range,” he says. “But we still see the chance for higher prices for 2010 beans. We still believe $11 is a reasonable goal to make some substantial sales.”
Frew also sees stronger prices ahead for soybeans. But he still took out early price protection for a portion of his 2010 production. “We bought some $9.11 November 2010 futures,” he says, and looks to get additional soybean marketing completed long before planting.
Usset's simulated farm is expected to produce 24,000 bu. of soybeans from 530 acres. His strategy then calls for another 2,500 bu. to be priced at $8.85 c or higher, based on $9.55 or higher November futures by March 29. “The pricing tool could be a straight futures contract, forward contract or HTA,” says Usset.
The plan continues with an additional 2,500 bu. priced at $9.35 c or $10.55 f by April 14; 2,500 bu. at $10.35 c or $11.05 f by May 13; 2,500 bu. at $10.85 c or $11.55 f by May 27; and 2,500 bu. at $11.35 c or $12.05 f by June 10. The pricing tool — either forward contract, futures, options or HTA — would be determined when the sales are made.
Usset's plan would make no sales if prices are lower than $8.35 c or $9.05 f. “The plan would involve 12,500 bu. and all options positions would be exited by Sept. 10,” he says. “Remaining bushels would be marketed during market rallies or postharvest.” (For more on Usset's marketing plans, go to http://tinyurl.com/UssetMktPlan).
RON DEINERT NOTES that making futures sales rather than cash sales early in the season is more profitable. “Last winter the basis was $1 while coming into harvest the basis narrowed to 25¢. That's an extra 75¢ we pick up,” he says.
He contends his marketing program, even though often aggressive, “isn't different than what a lot of others are doing.” He adds that with puts and calls, “you're buying protection just like buying car, life or health insurance. You have a floor. I'd rather be selling at a price higher than the floor price.”
Frew says he has learned to try and lock in input costs to help him establish early costs of production. “We try to lock in our anhydrous ammonia so we know what we're working with,” he says. “We also try to lock in our fuel and seed as early as we can if we feel the price is good for them.”
Knowing when to make sales, he adds, doesn't guarantee a price that's at the top of the curve, but one that can provide a reasonable profit level.
Advice like that from a 25-year-old, as well as that from veteran-marketer Deinert, is knowledge that should benefit anyone looking to sleep better during the growing season.