Hold onto your hat. As price charts gyrate and input prices soar, we asked a panel of veteran north-Iowa growers how they manage their risks in this environment. Here's what they had to say. (For details on these panelists, please see the sidebar below.)
NORM CHAMBERS: We have no choice now; we have to be really astute on how we market. We have thrown our conventional thinking out the window. My thinking in these times is to market-average. I'm still gun-shy about 2008 commitments, though.
Our food-quality beans get the price at the time they are sold, so there is no market timing there. Our market price is determined by how well we meet consumer tastes, not so much by market timing.
ERWIN JOHNSON: I agree. Seasonal tendencies that have served us well in the past may no longer apply this coming year.
BOYD CAMPBELL: To play the devil's advocate, bankers say you won't go broke taking a profit. But I think that if you're in production agriculture, you have to hit a home run once in a while. There's too much against you, such as weather and costs. You won't win a game hitting singles.
GARY LOOS: In grain marketing, it's difficult to hit a home run while minimizing risk. We mitigate risk by making several smaller sales, taking into account seasonal price patterns and current trends. The main risks are the markets, inputs and weather.
We have about one-third of our 2008 crops priced and are considering additional sales. By forward-selling and locking in inputs in tandem, we should be able to pencil out a profit.
Once you nail down your rents, you'd better nail down the other input costs soon. Most of our clients purchase crop insurance to secure some protection against adverse weather.
VIC WOLF: If you know your total breakeven for your whole operation, you won't go broke locking in a profit. Last October I thought (2007 crop) beans looked good at $9 and sold them. I also locked in seed and fertilizer at a 10-12% discount; that turned my beans into $11.
BOYD CAMPBELL: Some guys have way too much of their crop forward-priced. Some of the big-name grain marketing analysts urge you to lock in prices two to three years out. I don't know.
BEN JOHNSON: You can't go wrong locking in today's prices. I have some of next year's grain prices locked in — approximately 50 bu./acre of corn and 10 bu./acre of soybeans priced (as of Feb. 1). My risk-management strategy is to sell up to my insured bushel guarantee during the spring planting season when weather worries are typically the greatest.
I am also considering using options on unsold bushels to protect the downside, although I have never done this before. On the other hand, I have not had this much money at stake before. I fear that these markets will turn around when we least expect them to and decline much faster than I would feel comfortable with if I didn't have some of these record profits in the bank.
High prices don't mean anything unless you take advantage of them. You have to take some of the money off the table.
WAYNE JOHNSON: My goal is not to eliminate risk and the opportunities that go with it. Exposure to risk gives you profit. For me, the question is: What is a reasonable level of profit and risk?
You can manage risk if you give it some thought. For example, we could hypothetically eliminate weather risk by having four planters. (Johnson has developed alliances with neighbors in a 40-mile radius where they could provide planters, combines or cultivators in the event of a weather problem.)
We could eliminate marketing risk with calls and puts, even though it requires hundreds of thousands of dollars to take a position. That's what we are paid for: managing risk.
I try to break it down to how many dollars do I invest in equipment and marketing to manage that risk. That is the biggest management challenge: How do I allocate funds to minimize that risk? Which risks are we willing to assume and which ones not? I am not willing to assume the big moves in the market.
My approach is to sell in smaller increments, but to keep doing something. I'm not trying to hit a home run; I just keep stepping in. Looking at the 2008 crop, I've marketed about half my corn and I haven't yet sold any 2008 beans (as of early February).
We're in uncharted waters; no one has any sense of what these index funds will do. I don't want to look back and feel that I missed a tremendous opportunity, but I'm marketing in much smaller increments than before.
Now is not the time to cut back on crop insurance, even though premiums are going up. I'm willing to invest more because of the value that it has, so I am investing more in crop insurance than I ever have.
ERWIN JOHNSON: These markets remind me of a Buddhist saying: “A fool who thinks he is a fool may indeed be wise. A fool who thinks he is wise is indeed a fool.” Humility is probably the one lesson that has benefited me over the years in marketing.
We are in a low-margin business, typically with returns of 3-5%. Unless a producer is really clever, that return has probably not deviated over the last 20 years. This, I believe, is an opportunity to go after a return higher than those numbers.
At these incredible prices, I recognize that I've been holding off pricing the new and old crop until this week (early February). I am probably not your typical grower. This is the third opportunity in my farming career to go after high returns.
So many stars are lining up. We have the low value of the dollar, the incredible domestic and export demand, a battle for acres and weather odds that we may not make trend yields. So I will not sell all of my crop. I'm going to hold off on at least 50% of my crops with the goal of achieving much higher prices than we have today. I will purchase as much crop insurance as I can afford.
MEET THE GROWERS
These growers shared their thoughts with Corn & Soybean Digest recently in a round-table discussion:
Boyd Campbell, Rudd, IA, raises cattle, hogs, corn and soybeans, with some oats and hay.
Norm Chambers, Corwith, IA, grows corn and soybeans. He sells edible soybeans to Japanese and Tosteds brand roasted soybeans.
Erwin Johnson, Charles City, IA, grows corn, soybeans, commercial hay and, until recently, identity-preserved edible soybeans.
Gary Loos, Mason City, IA, manages about 40 farms as a professional farm manager for Hertz Farm Management.
Ben Johnson, Floyd, IA, raises corn, soybeans, hogs and feedlot lambs; has a seed sales business with his father.
Wayne Johnson, Forest City, IA, is a corn and soybean grower. He also has some seed beans and low-lin soybeans.
Vic Wolf, Hampton, IA, raises corn and soybeans and has a cow-calf herd.