If your corn production cost is $3-3.50/bu. and you can sell it early for $6, how fast can you call your local buyer and make the deal?
That’s Craig Bunnell’s attitude toward getting much of this year’s crop marketed before planting time. The Ensign, KS, grower had about 50% of his family’s corn marketed before March 1 and was looking to make further early sales this spring.
But there are many who are still bullish on corn blowing through $7 or higher at the elevator. Are they making smart decisions or pushing the envelope a little too far? “The path of least resistance is up, but you can’t afford to pass up these opportunities,” contends Mark Clark, Professional Commodities Management broker, Dodge City, KS, and consultant to Bunnell.
Melvin Brees, economist, University of Missouri Food and Agricultural Policy Research Institute (FAPRI), adds that even though fundamentals point toward strong corn and soybean prices, growers should consider selling some of their crops at stout levels.
“You should be protecting some of these some way,” Brees says.
Bunnell, who farms dryland wheat and sorghum and helps market his mother’s irrigated corn, normally sells to a local elevator. But he covers the corn risk with futures and options. Scale-up sales grabbed Bunnell’s attention early in the year. He used December 2011 corn futures to lock in prices.
“We made our first sales of about 25% of the crop in January at $5.50/bu. futures,” he says. “We then sold another 10% when the market moved to $5.80, then another 10% when it hit $6.10 (in mid-February). Another 10-20% is slated to sell if futures hit $6.40.”
Bunnell backed up his futures contracts with an options spread. “We bought September $6.30 puts and sold September $7.30 calls,” he says. “With that strategy, we’re protected against large margin calls if the corn price increases toward $8. The calls will cover the upside.”
With the cost of the put options at about 60¢/bu. and sale of the calls at about 50¢, the cost of the options strategy was about 10¢/bu., says Bunnell.
Prices at $6.40+ for corn or a return of soybeans to $14/bu., which they surpassed in mid-February, wouldn’t surprise Dennis Conley, University of Nebraska agricultural economist. He’s extremely bullish on corn and soybeans. “If I was growing corn this year, I wouldn’t be very interested in doing many advanced sales,” he says.
“We’re looking at the record low level of carryover stocks based on WASDE reports. Those stocks haven’t been this low for decades. We might have a weather market this spring or summer. As we get into the planting season and see some planting reports, I might lock in some more corn and soybeans, but probably not until then.”
USDA projects corn stocks at the end of the 2010-2011 marketing year at about 675 million bushels, only 5% of projected marketing year consumption. There are anticipations that corn acres will approach 92 million or higher. Corn usage is expected to remain strong, with ethanol alone looking to use some 5 billion bushels for fuel production this year.
“There’s no doubt there’s a very strong demand picture and outlook for the next two to three years, unless the government backs out of its ethanol subsidies,” says Clark. “There’s potential for 92-93 million corn acres for 2011. That could pressure prices if we make a good crop nationwide.”
Brees says the strong demand and tight carryovers are reflected in old-crop corn prices. He points out that in mid-March, December corn futures were about $1 lower than March futures prices, adding that November soybean futures prices were about 30¢ below March futures prices.
This indicates that the market recognizes that 2011 production could rebuild tight supplies. “A person hates to pull the trigger too quickly,” says Brees, “but we have some profitable prices. There’s so much uncertainty. Fundamentals are strong, there are tight supplies both world and domestic and demand is hanging in there.
“It’s all the other things that have us concerned: the economy, the value of the dollar, the weather. There are many things that can cause prices to go up or down.”
Brees doesn’t recommend a single marketing strategy, but encourages growers to have programs in place to capture higher prices. “They can consider using ‘trailing stops,’” he says. “You have downside stops to make sales if prices start down. But as the market goes higher, you raise those price levels.
“In mid-March, when the December corn futures were about $6-6.10, this plan would help them trail the market higher. For example, you have an order in to sell if the futures price drops below $5.80. If prices increase, follow the market up until it moves above $6.30 and you increase the sell order to $6. If the market moves even higher, continue to increase the sell order price until the market breaks lower and triggers a sale. Watch the market very closely.”
The same can be said for soybean sales; have a target to trigger sales as the market moves higher, says Brees, adding that the traditional scale-up plan could be a winner for growers this year.
Bunnell says having a scale-up plan in place can add to already good profits. “This type of marketing takes part of the emotion out of it,” says Bunnell, who also uses corn futures to hedge his milo production. “You’re not hedged at one single price. You can average it out.”
Ed Usset, economist, University of Minnesota Center for Farm and Financial Management and Corn & Soybean Digest profits columnist, is bullish on corn and soybeans, noting that some growers regret having sold too early.
“It becomes a challenge because the market keeps going up,” says Usset. “But growers can’t dwell on the fact that some potential production has been sold too early and too cheaply. Instead, dwell on the fact that they’re not completely sold. That’s probably one-third to one-half of the crop left to sell.”
Usset usually doesn’t project what prices will do, but points out, “I’m not seeing any lessening of demand. I’m not seeing signs of rationing on the demand side.”
He advises growers to use government Risk Management Agency crop-revenue insurance and market their crops based off their coverage. “Most people are buying crop insurance in the 75-80% range,” he says. “They should get sold up to that before harvest.”
Melvin Brees, University of Missouri FAPRI economist, says RMA revenue protection insurance provides a starting point to manage some of the risks. “Base prices are on track to exceed $6 for corn and over $13.50 for soybeans,” he says. “While this provides revenue protection, it does not cover that much price risk if normal yields are produced.
“At 75% coverage, it would take corn prices below $4.50 to trigger payments with APH yields. This is $1.50 or more downside price risk. Revenue protection is an important risk-management tool, but more is needed to manage price risk.”