When you farm 35,000 acres in five states, balancing input purchases with crop pricing can boost the bottom line. But a leading indicator to make one of those trades may not keep you from lagging on the other in the decision-making process. That’s Donny DeLine’s attitude. He doesn’t always market the same percentage of corn or soybeans to match production with inputs bought. But if both ends of the spectrum look good, he takes action. In fact, early fertilizer purchases and bulk buys last summer helped him save 20% or more over prices this spring. And by booking corn early, he had almost 50% of it priced at $6 or higher.
DeLine, 42, has farmed on his own about 15 years. He started in the Charleston, Mo., area, where he’s a fourth-generation farmer. He quickly realized the advantages of spreading out. He began putting together more rented land in Missouri; then added farmland in southern Illinois, western Tennessee, eastern Arkansas and northern Mississippi. Always the optimist, he added another 8,000 acres in 2012.
“It helps to spread the risk across a wide area," he says.About half his corn and soybeans are grown in Missouri and Illinois and half in the three southern states. His production also includes wheat, cotton and rice. “We have a diversity of crops in different locations. I don’t have all my eggs in one basket in the event of weather problems.”
The diversity of his north and south farm locations helped him dodge the summer’s drought conditions on much of his production. His Missouri and Illinois crops suffered more than his crops in Arkansas, Mississippi and Tennessee, which received some timely spring and summer rains.
DeLine strives to buy inputs and make sales when both actions likely yield a solid profit margin. Fertilizer buys started slower than normal for 2012.
“We normally start buying a portion of our N, DAP and potash early in the fall if the price is attractive,” he says. “We began locking in a few inputs late last summer. But the prices were too high to lock in large numbers.” That attitude changed in late January, when it was apparent that corn acres would be higher and demand for fertilizer would increase.
“We ended up locking in most of our inputs by mid-February,” DeLine says. “We saw them take off because of the increase in corn acres, so we locked in 85-90% of our needs. That included buying urea at near $400/ton and liquid at $340/ton. Both were substantially higher in early summer.”
Be ready to sell
While pricing inputs, DeLine watches crop sale opportunities a year or more before harvest. Corn is contracted off the September contracts and soybeans off the November contract in Missouri and Illinois. A few southern elevators also allow him to set futures off the September contract. “We can usually deliver corn and beans earlier than production areas farther north,” he says. “So the Septembers work better for us.”
Bullish on both corn and beans, he made 25-35% early sales in September 2011 when corn hovered over $6.40/bu. and beans were over $13.50/bu., adding that he chose not to lock in a comparable percentage of inputs because prices, again, were “too high.”
When crop prices started down last fall, his sales stopped. “We started making sales again when corn was about $6 on the futures and beans pulled above $13 again,” he says. “With about 650,000 bushels of on-farm storage, we’re not afraid to store corn, beans or wheat until we see a better price.”
DeLine’s corn, soybean and wheat marketing is done via consulting work with Hurley & Associates, Charleston, Mo. His first corn sales in September 2011 were at $7.06 for about 15% of his crop. He made another 10% sale at $6.01 at the end of December. Another 10% was sold at $6.08 in January. He made a small 5% sale in March at $5.63. Another 10% of his corn was sold at $5.53 in mid-June.
For soybeans, he started making 2012 bean sales last September with 10% of his expected production sold at $13.94. He then made a 5% sale in December at $11.41, then another 5% December sale at $12.06. Another 10% sale was made in late January at $12.13. The next sale was in March at $13.23 for another 10% of the crop. Another 5% sale was made in late May at $13.85, with one more 5% sale in June at $13.73.
DeLine used both futures and cash contracts for the sales, adding that another 10% of his corn and beans were sold during the weather rally in late June when corn surged to $6.50 and beyond, and beans flew past $14.
In mid-July, after corn and bean prices exploded due to the drought, another 10% of beans were sold at $16.40. And 10% more of his corn was sold at $7.80. “Those were cash prices for fall delivery,” DeLine says.
So with about85% of his fertilizer purchases made by early February, he still had only 50% of his corn and beans marketed in late spring before becoming about 70% sold in mid-July.
“I can see where guys try to buy inputs equally with making sales,” DeLine says. “But sometimes it makes more sense to hold off on too much pricing if grain prices are too low.”
Gary Schnitkey, University of Illinois agricultural economist, says growers should measure their own situation when deciding on inputs and crop sales. But overall, “pricing inputs and grains at multiple points in time will reduce risk,” he says. “I would suggest beginning pricing a crop over roughly the same period as inputs are priced. This will allow price averaging over a fairly long period.”
Ed Usset, University of Minnesota Extension economist, adds, “The best risk management is not just price risk management, but margin management. And margin management involves managing input and output prices.”
Put a pencil to 2013
Usset encourages growers “to put a pencil to 2013. You have a sense of fertilizer costs and, hopefully, other key variable costs (land rent, fuel, etc.). You have a futures market that tells you the value of the 2013 crop.
“What do these figures imply for your gross margin per bushel or per acre in 2013? I would not take action today if the figures indicated a breakeven scenario. I would take action on a portion of my crop if the figures indicated a large margin. It’s the burden of each producer to define a ‘large margin,’” Usset says.
Melvin Brees, University of Missouri agricultural economist, says 2013 planning can help growers begin paying their costs early. “It comes down to identifying profit margins and market signals in a variety of markets to identify price sales or targets for amounts that the grower is comfortable with,” he says.
DeLine needed the corn and bean price rallies before making any sales for the 2013 crops. “We’re definitely getting involved in 2013 with 10% of sales made in mid-July for corn, soybeans and wheat for next year,” he says. “We’re also looking at locking up some of our N, potash and DAP for 2013 in August. I think fertilizer prices are going to be much higher than anticipated, based on the fact that everyone will try to plant as much corn as possible with the high grain prices.”
He adds that good relationships with landlords, farm managers and consultants mean further expansion is possible. “My crop is in good hands because I have good farm managers and employees. My uncle, Smith DeLine, is not only a landlord in Missouri, but also advises me on crops in the Bootheel and southern Illinois. My father is also a landlord.
“As long as we can manage things efficiently and use economies of scale, we can purchase many of our inputs locally and provide good jobs for people. That puts money back into the community. All of those things are pluses.”