January was a difficult month for grain prices and producers. Corn and soybean prices lost 15% of their value, with a good portion of that damage in the days following a surprisingly bearish January WASDE report.
The 2009 harvest was particularly long and difficult, and it hurts to watch a crop in storage lose value. However, what made the January crash so painful was the crushing realization that these lower prices were not affecting one, but two crops; old crop held in storage and 2010 new-crop prospects.
The whole episode raises an interesting question. When does the next crop become a blip on your marketing radar screen, i.e., when does it become relevant to your business? Maybe the more important question is this: When should new crop become relevant? Let's ponder this question by considering the extremes.
First, how far out is it possible to consider new-crop pricing? Today, the futures market is offering quotes on new-crop corn and soybeans through 2013. I like a proactive approach to marketing, but pricing grain four years out takes nerve. What will fertilizer cost in 2012, and what about fuel, chemical and seed costs? Can you price grain on rented ground, not knowing if you will be the renter in three years? Pricing grain more than one year out demands a number of important assumptions about input costs and crop rotations. We live in an uncertain world, and some of these assumptions could be dead wrong. It is a rare producer who prices grain more than one year out.
THE OTHER EXTREME is represented by producers who say, “You can't sell what you don't have.” These are the farmers (and I still meet them) who refuse to price grain before harvest. So, when should new crop become relevant? The answer lies somewhere in between these extremes.
While my official start date for pricing before harvest is Jan. 1,I am willing to take action earlier at higher prices (you can find my plans at www.cffm.umn.edu/GrainMarketing/MarketingPlans.aspx). For example, I wrote my 2010 pre-harvest marketing plans and priced some bushels in early June 2009, about 16 months before harvest. It was then that quotes for fall fertilizer application became readily available, and I could start drawing an accurate bead on my 2010 production costs.
By late spring, I anticipate quotes on the price of fertilizer for application in fall 2010. When that happens, consider 2011 new-crop pricing on my marketing radar screen.
The collective groan I heard in January tells me that most producers are not comfortable looking that far ahead. Thank goodness for the popularity of revenue-based crop insurance! Working with your local agent and sifting through endless choices concerning coverage and enterprise units serves as a valuable wake-up call. You are buying insurance based on values established in February and, like it or not, once insurance is purchased the next crop is in play. You need to get serious about new-crop pricing opportunities.
For the producer who still refuses to consider pricing new crop until late in the season, I have some words of advice: You need a bigger radar screen.
Ed Usset is a grain marketing specialist for the University of Minnesota Center for Farm Financial Management (CFFM). He can be reached at usset001@umn.edu.