John Story had about 25% of his expected 2012 corn production marketed by March 2011, two months before the government’s intentional explosion of a Mississippi River levee that flooded his fields in southeastern Missouri. Despite the worst disaster in his region’s history, the deep water didn’t drown his spirits as he geared up for even stronger grain sales this year.
Story farms near Charleston, and has some fields just below the big river’s levee system, or “spillway” to the locals. His corn, soybean and wheat rotation takes advantage of the sandy loam soil that normally delivers strong yields.
He developed a marketing plan designed to generate acceptable profits when they’re available, working with a marketing consulting firm, Hurley & Associates. He doesn’t expect a home run every time he takes a swing at sales. Bunches of singles keep his profits at levels he can take to the bank. He feels it’s worth the consulting fee to secure the marketing service.
Story knows he can’t outsmart price volatility, like when December 2012 corn futures saw a whopping 80¢/bu. drop in prices within two weeks last November, slumping to about $5.35/bu. It rebounded to above $5.80 by Jan. 1 and was still above $5.80 by mid-month. That compared to old-crop March and May 2012 futures that soared from $5.80 past $6.60, due to corn stocks shortages worldwide.
Hot, dry weather in Argentina and Brazil added fire to U.S. corn and soybean prices. USDA and other forecasters indicated that early year rains weren’t enough to save the South American crops from significant losses. Such news made Story feel comfortable about holding off on major marketing moves over and above his early sales.
He strives to get a portion of his corn marketed a year or more in advance, if there is profit potential. His 2012 sales began in October 2010, when corn prices were struggling to stay near $5. “We used December 2012 futures contracts to get some initial sales made in that range,” he says. “That level is above our normal breakeven.
“We continued making sales into March of last year using December futures. We managed to get about 25% of our expected 2012 production marketed in the $5.80 range overall. We will be making more sales when December futures climb back above $6-6.25 bu.”
Alter the plan
The horrific flooding from the Mississippi last May altered Story’s marketing. The Army Corps of Engineers decided to purposely blow nearly a 2-mile-wide hole in the Mississippi River levee/spillway at Bird’s Point, MO, in order to spare flooding of Cairo, IL, a small town at the junction of the Mississippi and Ohio rivers.
Story and dozens of other growers saw their acres submerged by 8 ft. of water. He lost most of his wheat crop. His farm headquarters and shop had water at least 5 ft. high up the walls.
Since planting all of his 2011 corn acres was in jeopardy, much less knowing what lie ahead in 2012, more sales weren’t made when markets approached $6 or higher, says Deena Glenn, Story’s marketing consultant with Hurley in Charleston.
“Due to the uncertainty of the river and the temporarily rebuilt levee, we had to roll a lot of John’s futures contracts over from last year,” she says. “Some of those contracts were slightly discounted when rolled to the 2012 crop year because of a futures price inversion at the time of the roll.”
Story received a break from contracted corn delivery with a regional grain elevator. “The elevator was kind enough to work with us on rolling those bushels contracted for delivery last fall to fall delivery 2012,” Glenn says. “With the continued uncertainty on his corn acres for this year, we will likely use more put options to protect a floor price.”
Story will be looking at opportunities to make scale-up sales, using either futures or options, depending on when his planting intentions are more concrete. Ed Case, another Hurley associate, says the volatile grain markets and the chance for reduced 2011 ending stocks points to scale up sales starting when December 2012 corn futures hit about $6.25.
“There’s nothing magical about that price, but with technical analysis of the market, that seems to be a reasonable target right now,” Case says. “A $6.25 futures price and an average harvest basis of about 20¢ under provides them a price slightly above $6. With the balance sheets of many farmers, that is a very profitable level, assuming they achieve an average or better production. That’s a reason to be more aggressive when we see those types of prices.”
With some early 2012 corn sales in the $5+ range, Case says many growers use out-of-the-money call options to keep upside opportunity open and take advantage of any price rallies. “Many growers often leave 25-30% of their corn unsold because of production risk during the growing season when seasonally some of the best pricing opportunities can occur,” he says. “We recommend that growers protect those bushels with put options.
“Eventually we try to get everything covered with a floor price. And we recommend a strategy that provides upside price opportunity on 60-70% of a grower’s expected production while protecting 100% of expected production against downside price risk.”
Story says futures and options sales support his cash sales to several markets at river terminals. He takes advantage of swings in the corn basis. “Sometimes we’ll roll back December hedges into the September contract when the river basis tightens,” he says. “Since we are farther south than the central Corn Belt areas, we have corn ready for delivery in August, at the same time the corn pipeline is low.
“Buyers need corn, and the basis will often improve substantially above our typical 20-30¢ under. One year it even approached $1 over. We had corn come off early and were able to take advantage of it.”
Story has added more than 300,000 bu. of on-farm storage space the past 10 years. “It now totals about 500,000, so if we need to sit on some corn during low price periods we can,” he says.
Being able to manage the corn price can easily add to return from acres, adding that knowing his breakeven has been difficult with the weather situations he’s faced. “But you still have to measure your anticipated cost of production before you can seriously develop a marketing plan,” he says.