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Protect Your Margins
Mar 04, 2012
Last year at this time many producers were marketing grain fairly aggressively. Margins looked strong and many producers didn't want to pass up opportunities for strong returns. Some growers were priced at 50% or more of their estimated corn and soybean production. Conversely, this year the margins are not as strong. The motivation to make sales isn't very high, so many growers have little if anything priced for the 2012 crop. Emotionally it's difficult, because over the past couple of years doing nothing and waiting has worked as a pricing strategy.
Caution: Doing nothing as a marketing strategy could be a high risk scenario for your 2012 budget. No one can say with certainty whether we will see $4.00 or $8.00 corn. A case can be argued for either scenario depending on planted acres, weather, and demand.
With the cost of production at relatively high levels this year, risk management needs to be a key part of your business plan. Prioritize your time with your crop insurance agent to make sure you have adequate coverage. The spring price for corn this year is $5.68, for soybeans it's $12.55. Depending on your APH, these price levels will give most producers significant protection. As you evaluate your coverage options be sure to compare the gap between your cost of production and your revenue guarantee. In many cases, it's justifiable to increase levels of coverage.
Remember to stay on top of the price ratio between corn and soybeans also. With the recent rally in the price of soybeans, there are some farmers who are at price levels for soybeans which may warrant changing the plan back to soybeans on some acres.
Another way to protect your margins in the weeks to come may be with the use of options. If you're not comfortable with making cash sales at these levels or during rallies, you may want to consider putting a floor price under some of your grain. Depending on your level of crop insurance coverage and your strategy for pricing cash grain, you can determine your individual need for an options strategy. Each farming operation is unique and warrants its own set of strategies, so take the time to clearly understand the tools that are available.
There is nothing wrong with taking a profit on a small sale to get your marketing started for 2012, especially if you haven't done anything to this point. Profit margins were fairly large last year, so it's difficult to make pricing commitments when the margins are about half of what we saw last year. Be careful not to get caught in the trap of doing nothing at a time when you can protect yourself against downside risk. Now is the time to focus your attention on the tools that can protect your margins.