While many growers were slow to price some of their 2001 new-crop corn, Lanny Bezner felt comfortable with half his expected production covered at $2.60/bu. But he didn't market the grain in early January or even late last year. He sold it in mid-1999.
“I hedged that corn the summer of two years ago,” says the Dalhart, TX, grower who takes early marketing as serious as anyone who calls farming a vocation.
Bezner operates in the upper northwestern Texas Panhandle and into eastern New Mexico, rotating corn and wheat and running stocker cattle. He would grow soybeans, but they don't work well in his fine soil and 4,000' altitude.
His excellent groundwater sources and center-pivot irrigation enable him to nearly always generate a solid corn crop that averages 220-plus bushels per acre. But he has half of each crop marketed long before he plants it — sometimes even one to two years in advance.
“When Freedom to Farm went into effect, I knew there would be more corn planted because of the flexibility of the program,” says Bezner. “So I decided it was important to set a solid floor price virtually as soon as the marketing year appeared on the Board (Chicago Board of Trade),” says Bezner. “Unfortunately, those early, early prices are never where they should be for the type of profit we need.”
Nonetheless, when a $2.60-range December futures price popped up, he was eager to at least get part of his crop priced.
“I hedged half my 2001 projected corn yield by selling $2.60 December 2001 futures,” he says. “It hit that level in the summer of '99. I would rather have seen it at $3, but $2.60 is a price we can survive on.”
Bezner prefers to use straight futures as opposed to put or call options. For distant trades, the options premiums are too expensive.
Why market only 50% when he has sufficient irrigation to usually produce a sound crop?
“If I have hail or other problems, I'll still have production enough to cover my hedges,” he says. “And there usually are opportunities to market the remaining production in late winter or spring of the following year.”
With higher natural gas prices staring irrigation farmers in the face and higher fertilizer costs for everyone, corn plantings may be lower than many expect this year. That could mean a stronger price and stronger rallies.
Iowa State University economist Bob Wisner says growers still waiting to market '01 corn might consider selling futures, then buying call options to take advantage of price increases if weather or a severe drop in plantings does boost prices after the hedge sale.
He says out-of-the-money calls would be less expensive. “Growers can hold costs of options down and still participate in a major rally if it were to happen,” says Wisner.
For example, $2.90 or $3 December call option strike prices cost about 6-8¢/bu. And if bad spring or summer weather shoots prices skyward, the $2.50 futures price locked in early in the year would increase and the calls would increase in value.
Lower strike-price calls would be more costly, but would open growers to a better chance for profits from a smaller rally.
To lower costs of call options, growers can use vertical call spreads, says Wisner. In this strategy, a grower buys a call one strike price out of the money, and sells a call two or three strike price out of the money.
The strategy could also be considered for soybeans, says Wisner. For example, in late January, with November '01 soybean futures at about $4.70, a $5 November call could have been bought for 23¢/bu. A $5.60 November call could have been sold for about 12¢. So for the 11¢ difference, a grower would have a pricing window of between $5 and $5.60 in which to market beans.
But growers should recognize that the call option they sell can trigger a margin call on a sharp rally. And Wisner adds that “the rule is, don't sell more bushels of calls than you have hedged on the futures market.”
He advises growers to make marketing decisions based on their particular situations. “Cash-flow costs of producing corn and financial risk-bearing ability vary widely from farm to farm,” he says.
He reminds growers that historical data show that, between May and September, cash corn and soybean prices have decreased 73-78% of the time over the last 21 years. So it's likely unprofitable to store remaining 2000 corn or beans into summer counting on price rallies. “It's a long shot to see a profit or even break even,” he says.
He adds that harvest-delivery corn and soybean futures prices have shown a similar track record. New-crop call purchases let growers participate in the occasional big rally, but historically have expired worthless much of the time.
And like Bezner, Wisner sees the $2.60 level as a price that often looks good come harvesttime. “If corn prices are in that range, growers should look at their situations and determine if they want to lock in that type of price on some of their grain, or risk prices falling based on historical data,” he says.
Bezner had his '02 corn crop already hedged by July 1, '00. “It's priced at $2.65-2.70. Again, not enough, but enough to survive on,” he says.