Mike Kamler doesn't need a crystal ball to sell corn he won't pick until 2009. He skipped the palm reader session and locked in a $3.40-plus price last fall (2006). Kamler, who farms at Shickley, NE, with his wife Kim, figures if he can't profit from that price, he's in the wrong business. And early, early marketing is on his mind nearly every time he sees the Chicago Board of Trade ticker flash a new corn futures price for just about any contract month.
He's not the only one thinking about “way-out” marketing. With December 2007, '08 and '09 corn futures contracts offering prices high on anyone's chart, growers are not afraid to secure a $3/bu. cash price when prices close to $2 or below have been the norm in most years.
Dozens of new ethanol plants are going in nationwide and more are on the drawing board. For '06, some 2 billion bushels of the nearly 11-billion bushel corn crop is destined for ethanol production. Within three years, that number could easily jump to 4 billion bushels or more.
That's a main reason why corn futures prices started through the roof about the time the '06 harvest began, increasing from below $2.40 in early September to a fat $3.50 in early November. Huge fund trading also contributed to the price increase, as well as a slight reduction in production estimates in October.
But there is never a guarantee that prices will be closer to $3 than $2. Kamler isn't chancing it. He's making sure he has the upper tier prices secured if corn tumbles.
He did it with various futures-oriented contracts and crop insurance to back up every bushel he's hedged. He also has call and put options positions in mind to facilitate market rolls up and down, depending on corn price fluctuations.
Some might call it speculating. But for Kamler, using the marketing tools available to him is a secure way of guaranteeing himself a solid price.
“I guess you can say I'm a pretty aggressive marketer,” says Kamler. “When the market goes up and we can profit, we usually lock it in. We've seen those opportunities for '07, '08 and '09.”
His '07 marketing first involved selling December '07 corn futures and securing hedge-to-arrive (HTA) contracts, both in the $3.25 range. Those moves made in early summer of '06 were on approximately 75% of projected crop, the amount covered by insurance.
“Like a lot of other growers, I'm leveraged heavily, so crop insurance (Crop Revenue Coverage) is important for my corn and soybean production,” says Kamler. “On the 25% of production not covered by insurance, I used put options to put a floor under a price also in the $3.20-3.30 range.”
A similar strategy was used for '08 crop marketing. And for futures, HTA and put options position, he plans to use call options to roll prices up when the opportunity arises. Calls can help protect against market increases that can hurt futures positions. “If it's a December futures, we will often roll those to the July contract,” says Kamler.
$3.10-plus cash in '09?
Kamler has a strategy that has that price virtually booked. He got a $3.40 December '09 futures price last summer. He expects to roll that to $3.65 in July of this year or later. That futures price, with a typical 30¢-under basis, would provide a $3.35 price.
Even if the roll strategy isn't available, he still has $3.10 cash with the 30¢ basis off the $3.40.
“Some wonder how you can market so far out,” he notes. “They say that fuel, fertilizer, seed and other expenses will be much higher.
“But if I can make my average 200 bu./acre and be assured of an extra $1/bu. over my breakeven, that means expenses have to go up $200/acre. I feel I have a lot of room there. I don't think inputs will be that much higher.”
Lost Without Insurance
Mike Kamler admits he's an aggressive marketer and doesn't mind making distant marketing trades. But he wouldn't do it without Crop Revenue Coverage (CRC) insurance.
“I need crop insurance because I use HTAs and other distant marketing,” he says. “I usually use the 75% level coverage because it's the best bang for the buck. I also have crop hail to protect my production.”
William Edwards, Iowa State Extension economist, says CRC coverage benefits growers aggressively using HTAs, futures and other preharvest hedging pricing strategies.
“Growers can confidently pledge bushels to a preharvest marketing strategy,” he says. “Producers who like to forward price much of their production prior to harvest can use CRC or Revenue Assurance (RA) insurance with the harvest price option to protect themselves against harvesting fewer bushels than they contract.
“As long as they don't commit more bushels than they have insured, they can rely on the insurance indemnity payment to cover the cost of any shortfall,” Edwards says.
“CRC and RA with harvest price option are the same type of product,” he says, adding that probably 75% of Iowa growers have CRC or Revenue Assurance coverage. “A farmer's worst nightmare is to forward price and not actually produce a crop, then have the price go up.”
He says there has been a gradual shift to revenue insurance products and away from the standard yield insurance.
One problem that must be considered is that the level of guarantee from the insurance can be different every year. It may not coincide with the pricing established in an HTA or other distant contract.
In the crop insurance programs, the price used to figure revenue is based on December futures in the spring or in the fall, depending upon whichtime period has the highest price.
Edwards says that if prices are low early in a year, producers who purchase RA policies should seriously consider the harvest price option. “If prices are low early, it increases the odds that prices will rise by harvest,” he says.
“This is especially true for soybeans, given the possibility of yield losses due to Asian rust. CRC has the increasing guarantee as a standard feature. However, CRC limits the increase in coverage to $1.50/bu. for corn and $3 for soybeans,” he says.
CRC and RA with the harvest price option have a one-month time difference in determining the fall price. Sometimes there is also a difference in premium cost.
“It's a fairly simple concept,” says Edwards. “You can pretty much price the bushels you have insured. If not, you have to buy bushels to fill the contract. It covers you pretty well.”