Does marketing your corn or soybeans drive you nuts? Does pulling the trigger cause you to break out? Like it or not, marketing and prudent risk management is as important as making a good crop. For farmers with little marketing discipline, a decision grid can help solidify their risk-management program, says Carl German, University of Delaware Extension grain marketing specialist. He helped lead a USDA Northeast Center of Risk Management Education program to devise a marketing decision aid several years ago.
A decision grid provides a picture of possible pricing choices. But remember, no product or person has the perfect crystal ball. It doesn’t guarantee which direction to take. But a decision aid encourages farmers to ask themselves which marketing moves they should make, depending on their financial situation and market outlook and trends.
“We try to help farmers learn all they can about their marketing alternatives and how to use them,” says German, noting that even though his small state isn’t a major corn producer, some irrigated growers saw 200-bu. yields this fall.
“The dilemma with grain marketing is that there isn’t any one thing a farmer can do year in and year out and expect that to be the best thing he could have done. A lot of alternatives won’t work with different basis levels and price trends.
“That’s why a grid can help people decide ‘what should I be thinking concerning the current situation?’”
Decision grids list various options for you to consider in particular price situations, says German. He helped develop a four-corner grid (see graphic above), which examines the marketing moves that should be considered.
If futures prices are up and basis is strong, one grid suggestion is to set a basis contract and a minimum price contract. For example, if your average corn basis is 40¢ under and it narrows to 15¢ under at the same time futures are at $7.50, that strategy would provide a minimum price of $7.35.
“Or, a ‘courage call’ may also be in the strategy,” German says. “Since at-the-money calls are generally more expensive, courage calls are more likely to be out of the money. Courage calls should be used with discretion, since one is making a sale because either the price represents a profit and/or a price decline is expected.”
He says that if futures are up and the basis is weak, growers should consider using a HTA contract and set the basis later. For example, if your average soybean basis is 20¢ under but it widens to 60¢ under at the same time futures are at $16.40, the HTA would lock in the $16.40, and basis can be set when it narrows.
But with today’s price volatility and the many marketing alternatives on the table, German says grid suggestions are not cast in stone.
Remember, these are not recommendations, only potential strategies.
Volatile markets dictate the use of several marketing strategies to help spread your risk, says Jim Banachowski, The Andersons’ eastern regional manager and longtime grain merchandiser.
“Crop marketing is a year-round process,” adds Charlie Pearson, economist with Agriculture and Rural Development, Alberta, Canada, who helped develop a grain-marketing grid for Canadian wheat and canola.
German says, “There is no one right answer to ‘how do I price my crop?’ The decision aid is designed to assist grain marketers in sorting out the marketing alternatives appropriate for given market conditions.”
Northern Ohio farmer Gary Harrison has experienced most marketing situations offered by a particular futures or basis price trend. The 58-year-old takes the knowledge to heart.
Harrison and his son Travis farm about 4,000 acres of corn and soybeans at Wayne, Ohio. On-farm storage capacity is about 300,000 bu. With a trucking company as a side business, they can sell and deliver corn and beans to markets 100 miles away if the price is attractive.
If he had a lot of time, Harrison would probably spend it all on marketing. “Technically, we should spend 100% of our time on marketing. But that’s impossible,” he says.
He has learned some of his marketing skills by observing decision grids. However, he leans on marketing consultant Mike Mock with The Andersons, Inc., a multi-state agribusiness company with a grain division headquartered in Maumee, Ohio, to help him make sale decisions.
“He taught me that you have to pull the trigger,” Harrison says. “If you can make some money with $6/bu. corn, make the sale. I consider it hitting a lot of singles and not waiting on a homerun.”
Harrison started making 2012 corn sales two years ago. Why so early? The market offered a profit, so he took it. “Our lowest corn sales were about $6.35,” he says. “They were through The Andersons’ marketing programs. We also made some $6.90-8.65 cash sales to deliver off the September futures contract this fall. Overall, most of our corn will average about $7.70.”
Some of Harrison’s sales used a Cargill grain marketing programs. And like with those through The Andersons, none were made without a solid revenue protection foundation provided by federal crop insurance. “I can’t imagine farming without revenue crop insurance,” Harrison says.
Consultant Mock notes, “with revenue crop insurance, growers can safely begin marketing 15-20% of their crops to begin developing a marketing portfolio.
“Every marketing plan is different,” Mock says. “If a grower has 3,000 acres and no storage, it’s different than one with 3,000 acres and plenty of on-farm storage. Both should look at a reasonable return on investment and set price objectives accordingly.
“We ask a customer to show us their production plan, total acres, projected cost of production and marketing goals, then look at three or four marketing programs with diversification in mind.”
He says revenue insurance “is a subsidized put option. You can make your marketing decisions later with revenue insurance in place.”
For example, he says, if a drought-stricken grower sees his soybean production slashed to 20 bu./acre and he sells at harvest for $15/bu., he is not locked into having to deliver based on a 50-60 bu. forward contract.
The Andersons is like many grain-handling companies, in that it offers various marketing programs.
In one program for the coming year, the corn and soybean-pricing window is from Jan. 2 through Sept. 13, 2013. Cost to the farmer is about 6¢/bu. If the grains are marketed within the top third of the overall market, a 2¢ bu. performance fee for corn and 3¢/bu. for soybeans is charged. An additional 2¢ or 3¢ performance fee is added if corn and beans are marketed in the top 10% of the market.”
“There are more marketing tools to select from than ever before,” Harrison says, who feels the consulting fees are well worth the marketing expertise they provide. “That’s why I work with a consultant. But we like to do some cash sales as well to regional ethanol plants. When the basis gets stronger and they need corn, we can deliver it at a good price.”