Spring is sprung. So why am I thinking about last year's crop — that crop you augured into your bin last fall when corn was worth about $3.50 and soybeans close to $8.25/bu?
In hindsight, marketing after harvest was so simple the previous two years. In 2006, it took just three months for soybeans and four months for corn prices to climb $1/bu.
I'd like to introduce two grain producers: May Sellers and Hank Holder. Their approaches to postharvest marketing speak directly to your old-crop grain in storage.
MAY AND HANK HAVE much in common. Both have enough on-farm storage to hold 80% of their crop. Every year they fill their bins at harvest and wait (hope) for higher prices in the months ahead. The only difference between May and Hank is sales timing. May chooses to price and deliver her grain in May. Hank, the eternal optimist, chooses to hold his grain too long, selling at the end of the crop year to make room for the next crop.
Despite commonalities, their results could not differ more. I have examined the performance of six different postharvest marketing “styles” since 1990 (www.cffm.umn.edu/GrainMarketing/CelebMarketingPlans.aspx). May and Hank represent the extremes of those styles; the best and the worst in performance over the past 18 years.
Since 1990, May's approach of storing grain at harvest and selling it the following spring resulted in an average corn price 25¢ higher than the harvest price, net of variable storage costs (see table). Her same approach in soybeans netted a price 45¢ higher than the harvest price.
Hank insists on holding his grain in storage for another four months. Compared to May, Hank's average corn price is 40¢ lower; it's 81¢ lower in soybeans. That is a costly four months.
May's approach is not without risk — note how her net price was less than the harvest price in roughly one of three years. It appears that this year will be another one of those years. Hank's approach is not without merit — note how he delivered the best price among his peers, four years in corn and three years in soybeans. Strip away this handful of exceptional years and we must conclude that Hank's approach is a disaster.
Hank holds his grain to protect the upside in grain prices during the summer months. If you insist on doing the same, allow me to suggest the purchase of call options. I can hear your scream, “But call options cost money.” Take a second look at Hanks performance over time. Clearly, his approach costs money, too. Hank is the only person I know who can make options look like a bargain.
Before you allow yourself to get lost in the 2009 crop, take one more look at your 2008 crop in storage.
Ed Usset is a grain marketing specialist for the University of Minnesota Center for Farm Financial Management (CFFM). He can be reached at email@example.com.