Norman Stauffer sold much of his 2005 soybean crop for a whopping $6.71/bu. And he accomplished the $1.50-over-harvest price marketing without using futures or options.
He has nothing against these marketing tools, but he trusts using common sense to obtain a price that is good for him that's likely near the top of the market for the year.
Stauffer, who farms near Milford, NE, hit a homerun in his soybean marketing. It isn't something he or any other farmer does every year. A more reasonable goal for most growers is to be able to market soybeans or corn in the upper third of the market for the year while collecting any available LDP to boot.
Darrell Mark, a University of Nebraska-Lincoln agricultural economist, says that selling earlier in the year during seasonally high marketing periods will usually put growers in much better shape than if they wait until late summer or fall.
“The majority of the time, growers can do better by cash forward contracting earlier in the year,” says Mark. “If an LDP is available (such as with corn in 2005), that's an added bonus.”
As an example, he looks at pricing corn on April 1 vs. at harvest. There is a substantial advantage for spring marketing. “From 1998 through 2005, cash forward contracting corn on April 1 would have netted 50¢/bu. more on average,” he says, noting that any LDP would have added to that figure.
With forward contracting, Mark says, “On average growers should net higher prices. In 2005, growers would have received 85¢ more (compared to the harvesttime cash price) including the LDP. In 2004 it was nearly $1.50 more, offering the opportunity to net more than $3/bu. at one point and an added LDP.”
Stauffer made his marketing moves in early summer, when both corn and beans saw strong markets. He sold about 40% of each crop early. “I forward contracted my corn for $2.04/bu., when December futures were in the $2.40-2.50 range,” says Stauffer. “That wasn't as good as the price as I received for my beans, but with the LDP it should be a pretty good return.”
History usually repeats itself. According to data compiled by the University of Illinois' “Farmdoc” program, the contract lows for soybean futures have been reached in January, February or March in only five of the past 34 years. The most common times for lows are October/November and July/August.
The seasonality of bean price lows is similar in corn. Farmdoc says that since 1973-74, lows in corn prices have never occurred in January or February. Lows occurred in March and April only once, and never in May. The most common time for lows has been October and August.
Studies by Kansas State University also document the seasonality of corn and soybean futures prices. And it's a steady slope downward in mid-summer.
“Research indicates it's difficult to outguess markets,” says Kevin Dhuyvetter, Kansas State University agricultural economics professor. “But if you go back and look at a long time period — 20-30 years — seasonality in harvest delivery prices does exist on average, suggesting the benefit to preharvest pricing.”
There are never any guarantees that selling early is the best strategy in any given year. “However, by selling early, you would expect to benefit on average,” says Dhuyvetter. “But that is certainly not without risk. There will be years when you are worse off.”
Cost Of Foward Contracting
By not using futures or options for early pricing, growers don't face a basis risk. That is likely assumed by the grain elevator or other grain buyer, but at what cost to the grower?
Kansas State University economist Kevin Dhuyvetter says research in Illinois indicates that the cost of forward contracting corn might be as low as 1¢/bu. for grain contracted 100 days prior to harvest. However, other research has found the cost of contracting to be considerably higher.
“So if you routinely forward contract instead of hedge, you probably should expect to receive 2-5¢/bu. less because you don't have the basis risk,” he says.
Limited research suggests the cost of contracting wheat is similar or slightly higher than corn on a per-bushel range and higher yet for soybeans. However, with the major shift in seasonal prices from earlier in the year to harvest, the cost may be well worth it.
“I am a proponent of trying to simplify life,” says Dhuyvetter. “By all means, go with what has worked on average in the past.”