For farmers who got sucked into questionable multi-year corn and soybean marketing in the mid-1990s, talk of the 2013 fiscal cliff would be just a speed bump. Not only were there massive losses, some wound up with heavy fines and even jail time. Unsecured hedge-to-arrive (HTA) contracts mismanaged by elevators, market analysts and farmers caused the stench. Fast-forward 17 years. Corn and soybean futures still offer contracts more than three years out. Over $5.50/bu. for corn and about $13/bu. for beans. Still pretty tempting.
That doesn’t mean you should immediately start booking sales for 2016. However, many find that extended grain marketing offers them an opportunity to lock in what should be a profit well into the next marketing year.
The question is how far out to market and how many corn or beans to risk? “There is no hard and fast rule,” says Scott Irwin, University of Illinois farmdoc marketing specialist. “However, the higher the volatility, the shorter the horizon one should consider. Flexibility and volatility go hand in hand.”
Ed Usset, University of Minnesota grain marketing specialist, says there are too many variables in input costs and other factors that can turn what looks like a guaranteed profit into a major loss.
“Multi-year marketing is still valid for consideration. But I have questions that every farmer must ask,” he says. “For example, do you own your land or do you rent? Renters must be secure in the idea that they will have multi-year access to the land to match their multi-year pricing.
“Even if you own your land, are you that confident in other important variable costs, like fuel and fertilizer? Also, what will your crop insurance coverage look like several years out? These are important questions that will affect the success of a multi-year pricing strategy.”
Craig Turner, senior commodity broker and analyst for Daniels Trading in Chicago, says pricing into 2014 should yield positive results. But beyond that is dangerous. “Three years out it just too far. How do you even price it?” he says.
In early January, CBOT’s March 2013 corn was about $6.87/bu. December 2013 was $5.78, December 2014 was $5.65, December 2015 was $5.66 and December 2016 at $5.47. The nearby March had open interest volume of about 46,000. December 2013 was about 11,000. But beyond that, volume was less than 500 and virtually nil for 2016.
CBOT soybean futures were similar in volume. Open interest was about 58,000 for March 2013 $13.61/bu. beans, about 7,000 for the November 2013 contract at $12.72 and only 58 for the May 2014 contract at $13. There was little volume beyond that.
“The costs of being wrong are much higher with the larger price volatility,” Irwin adds. “Think of anyone who did substantial multi-year marketing in 2006. They got killed.”
Turner suggests growers should have at least 25% of their 2013 corn and soybeans marketed. “These prices (November beans and December corn) are too high historically not to lock in something,” he says.
“In past years we always wanted to have 10% sales by the January USDA crop report. This year is a special case so it is 25%. We have had four years of production issues in the U.S. due to weather. We had back-to-back South American (short crops) for beans combined with the U.S. drought last season.
“It only takes one really good harvest to get stocks back up to acceptable levels. What happens when we get a three in a row (South America-U.S.-South America)? Corn is at $4, beans $8 and wheat at $5.”
The lack of a reasonable volume of futures activity even two years out closes the door on most potential marketing moves. “You need an active futures market to price the crop years,” Turner says. “Even if the farmer is doing forward contracts or HTAs, the elevator needs the futures market to offset risk.
“I don’t think prices three years out have adequate price discovery. We only hedge that far out for special circumstances (i.e., it is initiated by the client).”
Usset says farmers should certainly be looking at marketing some corn or beans for 2013, and even consider some 2014 sales when input costs are narrowed down. “At this point, I am considering pricing 2013,” he says. “2014 opportunities will come onto my radar as soon as I start getting firm quotes on fertilizer (and land) costs – probably by this spring.”