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Big Crop Concerns Means Price Aggressively

April 21, 2010
 
 

By Linda H. Smith
AgWeb Marketing Editor

"I'm hearing a lot of producers say they are pricing new-crop corn and some are even pricing 2011,” reports Steven Johnson, Extension farm and ag business management specialist at Iowa State University. "Most are doing so in conjunction with Crop Revenue Coverage at the 80% to 85% level plus hail insurance. The Accumulator contracts really seem to be catching on.” Here's an example from one Iowa farmer Johnson knows, who is finished planting corn under excellent conditions.

"I went out on a limb last week and priced up to 163 bu corn for 2010 and 155 bu/a corn for 2011. On 2010, I have half priced with cash averaging $4.08 and the other half on Accumulators ranging from $4.45 to $4.60 if they don't get knocked out. On 2011, we priced all of it at $4.45 futures with a knock out of $3.40 but if it knocks out, the remainder prices at $4.05 and started pricing last week. For me this pays the mortgage payments and that was all I wanted. I think we have a potential for a big crop coming. This is the way it was in 2005 and we grew 200+ bushel corn consistently that year.”
With the Accumulator, you assign a number of business to "units” and you choose a pricing time period and price levels. Each day in the time period that prices are in your pricing zone, one unit is priced. If your prices trade above a specified level, two units are priced. If they fall below a specified price, sales are "knocked out” and you don't price anything. That's the one risk to the contract—you have downside risk, an you won't know until the end of the pricing period how much you have sold.

Johnson says: "I worry about 2011 prices if we have a big crop. Why not use the 2011 Accumulators and straight hedged-to-arrive contracts for 2011 as we will make money at $3.50 corn this year, so how can over $4 cash be bad? Granted there will be lots of weather and other issues between now and then, but if corn is $2.80 in the fall, guys won't have to worry about the 2011 crop year if the grain is not priced.”

Here's an example of one farm's sales:
    
  Corn Ave. Price Soybeans Ave. Price
2009  none left - 30% priced Dec 2009                                 $3.75 cash  70% priced April 2009        $9.16 cash 
  70% priced in April - June 2009 $4.03 cash 20% priced Jan. 2010 $9.05 Cash 
      10% priced April 2010 $8.75 cash
2010 42% priced DEC HTA off combine to ethanol  $4.32 futures 50% priced HTA  $9.95 futures
  23% priced DEC Accumulator to put in bins $4.50 futures Looking to price more with current rally  
  9%  price protected with $3.80 puts; looking to sell 15% on rally with Accumulator 
                       
$3.80 or better 35% covered with puts  
2011 23% priced on accumulator with $4.05 guar. if goes below knock-out. Trying to get another Accumulator for 2011 and if $4.42 or better will seriously consider.  $4.42 Looking at pricing $9.77 futures                 

"This is an example of what I would call a well run farm from a management and price-risk management standpoint,” says Johnson. "This guy has made money 12 out of 12 years and has a break even this year of roughly $3.35 and $8.25 and you can see where we have sold so far for 2010. I estimate he will buy another farm in 2010 if crop yields are at least average. Putting up 200,000 of storage this year with a dryer system due to profits made last year. Good prices and good potential yields. We are excited about 2010 and ‘11 at this point.”

These farmers are selling through Heartland Co-op, which allows rolling contracts to the next year if necessary. Other elevators also offer the contract (not all roll), as do FC Stone, R.J. O'Brien and Allendale Inc. For more information, see http://www.agweb.com/TopProducer/Article.aspx?id=156271
 

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RELATED TOPICS: Marketing, News, MoneyWise

 
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