With low corn prices and soybeans nothing to brag about, develop a 2014 marketing plan that prepares you for any good marketing opportunities that develop.
Dennis Shurtz, Arkansas City, Kan., is one grower biting the bullet and getting some 2014 and even ’15 production marketed at prices much lower than a year ago. “I booked some 2014 and 2015 soybeans at $11.60 in late November (based on November ’14 and ’15 futures prices),” he says. “There are going to be a lot of beans planted. So you just have to reach back and sell beans at these lower levels.”
Soybeans will make up about 40% of his 2014 production, with another 40% of his acres in wheat and 20% in corn. “I start making marketing decisions when I set my planting percentages,” Shurtz says. “Most strategies revolve around options and futures, often at the same time. I am using $14 November call options to protect the $11.60 futures in the event of a market rally.
“If December corn trades up to $4.70, I’ll market some near there. A lot of guys are having a tough time selling at these levels because they’re used to selling $7 corn.”
University grain marketing economists agree that “the highest prices for the year may be on the board right now – and they’re near breakeven at best,” says Corrine Alexander, Purdue University Extension grain marketing specialist.
“Farmers need to have a plan to take advantage of little rallies when they occur to bring up the bottom line,” adds Chad Hart, Iowa State University Extension grain marketing economist.
Use your breakeven
Your breakeven price is still the foundation of any marketing plan. University budget models for 2014 show slim margins, at best. A corn price of $4 per bushel to $4.50 is a Corn Belt norm. Beans at $11-$11.50 per bushel are being projected.
Plug in your expected yields and gross revenue, and then subtract your fertilizer, seed, insurance, storage, fuel and other costs per acre. If there’s projected profit, it’s likely slim. “In past years, you knew you would profit,” Hart says. “Now, with lower prices, you need to know exactly what your cost of production is.”
Alexander says that if there are even normal corn and bean crops in 2014, “it may be difficult to obtain a breakeven price for either. “So it’s not too early to start marketing your 2014 crops,” she says. “Set down with your elevator or marketing consultant to get started.”
Schedule periodic sales
“Look at marketing a little over a long time period, perhaps 5-10% per month, to get a price average,” Hart says. “Be more aggressive in pricing opportunities (caused by weather, export sales or world tension).”
Those sales could be through cash forward contracts, futures or options sales. Alexander says that if growers are comfortable with using options, then a strategy can be established to lock in a floor price and leave the upside open.
For example, with a December futures price of $4.50, a portion of the expected corn crop could be protected by an at-the-money put at a cost of about 40¢ per bushel. That would provide about a $4.10 floor, less about 2¢ in brokerage fees.
“If we see a big crop to where we increase our inventory from 2 billion to 3 billion more bushels, we could see prices substantially lower,” Alexander says. “So you have to look at what happens if the price the market offers today is the best you will see.”
She says as put-call spread strategy early on could provide a strong price window. For example, late last year (2013) a grower could buy a $4.50 December 2014 put option for about 37¢. At the same time, he could sell a $5 December call for about 14¢. That provides a price window of $4.50 to $5 for a cost of 23¢ per bushel.
“This can cheapen-up your price protection and provide an opportunity,” Hart says.
“They need to look at different risks and potential returns, especially on more complex strategies,” Alexander adds, noting that similar pricing programs could be written into a soybean-marketing plan to help get sales made 5-10% at a time.
Hart says that November 2014 soybean futures in the $11.50 range, there may be better early marketing opportunities. “The bean market is still offering a better than breakeven price,” he says. “We’ll likely see farmers be more aggressive in short term marketing in the early winter.
“It looks like the soybean market is prepared to move down as we look into 2015.”
Know your basis
Basis levels for both corn and soybeans can vary by 50¢ per bushel throughout the year. They typically narrow as the supply pipeline shrinks and widen when supplies increase. A $4.50 corn futures price and a 50¢-under basis is weak compared to $4.50 futures and 15¢-under or better.
“Our (Iowa) regional farmers had strong basis levels along with the weak futures prices (in November),” Hart says. “So we encouraged them to consider forward pricing their basis and leaving the futures price open.”
Growers should lock in a favorable basis when it appears, Alexander says.
With the lower prices, it’s likely that Revenue Protection insurance will see floor prices below the $5.65 for corn and $12.87 for soybeans seen for 2013. Prices are based on the year’s November soybean and December corn futures prices on March 15.
“Again, be more aggressive in marketing at a price that offers a good margin,” Hart says. “You can’t afford to be picky. Prices won’t be as hot.”