“New generation.” The term conjures up thoughts of Gen Xers and an even younger Gen Y crowd, iPods, iPhones, hybrid cars and crossover SUVs. But “new generation” is also an essential term in 21st century grain marketing. It gives corn and soybean producers a multitude of marketing methods that can suit virtually any level of risk-management needs.
From Cargill AgHorizons, this new-age marketing offers more freedoms than traditional corn and soybean marketing programs.
In a University of Illinois report, basic new-generation marketing includes automated pricing contracts, managed hedging contracts and a combination of the two.
“Automated pricing contracts follow predetermined, nondiscretionary pricing rules for marketing a farmer's grain,” says Darrel Good, Illinois Extension economist and co-author of the report. “These contracts give farmers the average cash or futures price — depending on the contract — over a set pricing period.
“Managed hedging contracts price a contracted amount of a farmer's production according to the recommendations of a professional market advisory service, over a set pricing period,” he says.
PERRY BRODERS, grain merchandiser for AGP Grain Cooperative, Lincoln, NE, works with numerous growers to develop marketing programs suitable for their operations. “Growers are making a conscious effort to be better marketers and can see the results of these efforts,” says Broders.
One of his customers is Richard Block, who farms with his son Scott at Roca, NE. “We use mostly forward contracts and let the elevator (AGP) handle the sophisticated marketing,” says Block.
He will work with Broders to determine the best program for his operation. One under consideration is an average price contract. “In this program, growers provide us with a set number of bushels to be priced over a predetermined period of time,” the merchandiser says. “It can be 30 days, 60 days, etc.
“January through March is usually a good marketing period,” Broders says. “If a grower decides to go with a Feb. 1 through the end of March period, we'll market a predetermined amount of bushels at the close of December corn or November soybeans each day. After the close of the marketing period, the grower receives the average price for that period.”
In the AGP Floor Price program, sales are made when the floor price goes above a specific futures price. A predetermined time period is set to make sales at or above the price.
“If $4.25/bu. is the floor price, then sales are made above that price,” says Broders. “As the time period gets shorter, the contract will automatically price more grain. The problem is if the floor price is never reached or all of the grain is not marketed, then the farmer must revert back to the old fashioned way of selling.”
THE FLOORED AVERAGE Contract offered by Country Hedging, Inc. (CHI), St. Paul, MN, also provides growers with new-age trading tools. “These contracts combine the wisdom of pricing bushels on a daily basis with the protection of a floor price to give the producer a powerful marketing tool,” says Kent Beadle, a CHI consultant.
“These contracts guarantee a floor price for the futures component of a cash sale. If the average price of the futures contract is higher than the floor over the life of the contract period, the producer gains the higher average. If the average price is below the floor, the grower receives the floor.
Beadle points out that these contracts cost less than exchange traded puts and calls and do not require the producer to make additional difficult marketing decisions.
Price Builder Contracts offered by CHI and others allow the grower to market bushels every day of the contract period at a floor price level above the futures level that existed at the time of contract creation.
“Bushels at that floor price build each day until either the contract period expires or a knock-out price below the market is hit,” says Beadle, noting that in today's volatile market, the Floored Average Contract may be more appropriate. “The Price Builder Contract is a great contract in marketplaces that appear to be stable, with not much price movement expected in the future.”
THE FLOORED AVERAGE and Price Builder contracts are under the CHI Compass network of contracts and are offered through a system of Corn Belt, Great Plains and Western region grain elevators as over-the-counter (OTC) contracts.
“Some contracts provide market protection using averaging techniques, while others more closely resemble exchange-traded options with non-traditional expiration dates,” says Beadle. “All can be used in a comprehensive marketing plan to more effectively manage price risk.”
Illinois agricultural economists say that when used in conjunction with traditional forward contracts or cash sales, new-generation contracts allow farmers to diversify their marketing plan and manage price risk.
“They really do have some merit,” says Good. “However, the specific characteristics of a contract need to be carefully examined prior to its inclusion in a marketing plan. Unlike a forward contract, the final price the farmer will receive is often not known at the time the contract is signed.
“Also, contracts that don't offer a minimum price feature offer no assurance of performance,” Good adds. “Managed hedging contracts, which involve discretionary sales by a professional, do not necessarily provide a guarantee that the final price received will be at or above the average price over the pricing period.”
Good points out that many new-generation contracts or conventional corn and soybean marketing “are things a farmer could do himself.
“The biggest problem for some farmers is that they often lose discipline. That is the biggest thing these contracts would bring to a farmer,” he says. “If a farmer has a weakness in that area, difficulty in making preharvest sales, these contracts will bring that discipline.”
Like all other strategies, Good says producers should allocate a percentage of their crops to these contracts and not the whole crop in order to have additional corn or soybeans to follow a mixture of strategies.
So for 2008 corn and soybean marketing, growers should look at both old and new sales methods to take advantage of the new generation of prices available in today's world of grain trading.