Grain marketing in this highly volatile marketing environment continues to be a big challenge for farm operators. Many grain producers are coming off a very profitable year in 2007; however, there is still a considerable amount of 2007 corn and soybeans that is not priced. Many farm operators have also taken advantage of some very favorable grain prices in recent months to forward price a significant amount of the anticipated 2008 corn and soybean production, and even some projected 2009 production. However, making grain marketing decisions beyond 2008 can be very difficult without knowing what input costs and land-rental rates will be, and now the strategies available to producers for forward pricing grain may be changing.
For the short term, grain prices topped out in early March and have been on a decline every since, and, in fact, a rather dramatic decline in the soybean market. Current soybean futures on the Chicago Board of Trade (CBOT) closed at $15.22/bu. on March 3 and at $12.07/bu. on March 20 – a drop of $3.15/bu., or 20% in just over two weeks. Similarly, the November CBOT soybean futures for 2008 new-crop soybeans dropped from $14.26/bu. on March 3 to $11.14/bu. on March 20 – a drop of $3.12/bu., or 22%. Cash soybean prices at Lake Crystal, MN, dropped from $14.38/bu. on March 3 to $11.09/bu. on March 20. New-crop forward-contract soybean prices for 2008 were $13.28 on March 3 and declined to $10.12/bu. by March 20.
Current corn futures on the CBOT were $5.55/bu. on March 10 and $5.07/bu. on March 20, while December 2008 corn futures were $5.79/bu. on March 10 and $5.21/bu. on March 20. The local cash corn price at Lake Crystal, MN, dropped from $5.35/bu. on March 10 to $4.65/bu. on March 20. The local new-crop corn price for 2008 was reduced from $5.28 on March 10 to $4.68 on March 20. In addition to the drop in corn prices, it appears that local grain markets have widened the basis on the current cash corn market, which is the difference between the CBOT corn price and local corn price on any given day. The cash corn basis in early March at many local grain markets in southern Minnesota was 20-25¢/bu. under CBOT corn prices, which had widened to a basis of 40-45¢/bu. under CBOT prices by March 20.
Grain Marketing is Changing
Farm operators have a tough dilemma. There are still some good grain marketing opportunities for 2008, 2009 and beyond, however, easy access to market the grain is slipping away. Many local grain elevators and some larger grain merchandisers are no longer offering simple cash grain contracts for 2009 corn and soybeans, and some have put restrictions on 2008 forward contracts. Some local grain elevators are requiring producers to have a separate margin account in order to forward contract grain. This means that a producer will have to cover all or part of futures market margin calls that may occur if the futures market increases above the forward-contract price. This type of arrangement will require a producer to have a line of credit with an ag lender, very similar to grain hedge accounts with the CBOT. Just like a grain hedge, these contract arrangements should clear-out by the time the forward grain contract date is reached. However, the interest paid to finance the margin account will be an added cost to the producer, thus reducing the net price that they received for the grain under the original forward contract. For example, if a producer forward prices 2009 soybeans at $10/bu., and the CBOT price averages $4/bu. higher than the CBOT price from the day of the contract (April 1, 2008) until the date the soybeans are delivered (October1, 2009), the added interest cost at 7% would be 42¢/bu. for 18 months, and the net price of the forward-contracted soybeans would be reduced to $9.58/bu.
Some grain elevators and grain processors are pushing basis contractsto forward price corn and soybeans. With a basis contract, a producer is locking in the basis on a particular date, which is the difference between the CBOT price and the local cash price. The basis on March 20 for October delivery was about 50-55¢/bu. for 2008 corn, and about a $1/bu. for 2008 soybeans at local grain elevators in south-central Minnesota. It is important to remember that a basis contract does not protect against sharp declines in the grain markets; however, it does allow for upside potential in the markets. If we get into a situation of short grain supplies again later in 2008 or in 2009 that cause the basis to tighten, a producer with a basis contract will not realize that market improvement. As mentioned earlier, the cash corn basis in early March was only about 20¢/bu., compared to the current cash market basis of over 40¢/bu. and the new crop basis of over 50¢/bu. There are times when a basis contract is a very good grain marketing strategy, but not at all times. It is important to recognize the difference.
The bottom line is that grain marketing for 2008, 2009 and beyond is becoming extremely complex, and there are many newer type grain marketing alternatives and contracts being offered to producers. It is very important that farm operators understand these grain marketing alternatives and implications before entering into contracts. It is a good idea for a producer to review potential grain marketing strategies and contracts with a trusted grain marketing consultant, their farm management advisor and their ag lender before finalizing a newer type of grain marketing contract in order to understand all the grain marketing and financial implications for their farm business.
Editor’s note: Kent Thiesse is a former University of Minnesota Extension educator and now is Vice President of MinnStar Bank, Lake Crystal, MN. You can contact him at 507-726-2137 or via e-mail at kent.thiesse@minnstarbank.com.