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Lock in Margins

January 29, 2014
By: Ed Clark, Top Producer Business and Issues Editor

Marketers focus on cost and return spread

seed safe  margins

A small but growing number of producers such as Steve Compton are moving away from a focus on price and toward margins.

"To me, margin management is no different from any other aspect of farming—it just has to be done," says Compton, who grows 20,000 acres of corn, soybeans, wheat and milo near Scott City, Kan.

Compton must be vigilant every day to know the tools available and understand the opportunities, as well as risks. You can bet Compton stays in close contact with his marketing adviser. It’s one thing to watch for opportunities and another to take action based on his cost structure.

"I became 25% sold on the 2014 corn crop late last summer," he shares. "At that time, futures prices were $1.60 above current levels."

Nothing is complicated or even new about the concept of margin management: locking in production costs and crop prices near the same time frame, which provides hard numbers for your profit potential.

Seeking to lock in an acceptable margin is light years removed from trying to pick the best price and requires a new way of thinking, says Lawrence Kane, a branch manager with Stewart-Peterson in Yates City, Ill. Without a focus on margins, producers are marketing in a vacuum, Kane says.

T14037 Dive Into Margins Craig Duley

"I need to use options to protect my income, protect my family and provide opportunities to expand."—Craig Duley, Maquon, Ill.

Compton begins margin management in August and September, when he locks in nearly all his inputs for the following crop year. In comparing input prices throughout the years, he’s found that’s typically when the best deals are available.

For instance, he says dealers have unused crop chemicals that have been returned and might offer attractive prices. "You have to lock in crop sales at the same time," he says, to guarantee a profit margin.

Compton has irrigated and dryland crops and forward sells a higher portion of his expected production on his center-pivot land because it has less production risk.

Admittedly, early January’s $3.80 per bushel cash corn in the Corn Belt didn’t provide much in the way of a profitable margin for all but the lowest cost producers. Even so, Compton was selling unpriced corn for March delivery to a local feedlot because basis was 50¢ above Chicago Board of Trade futures, or about $5 per bushel.

"We have a unique situation here because Scott County has the most cattle on feed of any Kansas county," he explains. "While 50¢ is unusual, local feedlots often offer 20¢ basis." Feedlots don’t like to contract more than 9 to 12 months out. So when he sees a positive margin in the futures market beyond that, Compton uses a combination of futures and options.

Impetus for Change. Compton embraced margin management 10 years ago for two reasons: "volatility and size." Markets started becoming more volatile, and more was at risk because of his production volume.

"Prior to that, prices often moved no more than 20¢ to 30¢ in a year, so forward pricing wasn’t so critical," he explains. "Now they can move that much in two hours, with annual swings of more than $2."

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FEATURED IN: Top Producer - February 2014

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