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Sales in a Risky Year

July 29, 2008
By: John Russnogle, Top Producer Guest Editor
 
 




The markets and many rivers hit new highs this summer. The timing of the rivers' crest was predictable, but the markets were far less certain.

Nebraskan Jeff Shaner watched the simultaneous bounty and disaster as the Missouri River invaded the fields he farms with his father, Neale, at Ft. Calhoun, just north of Omaha. He finished replanting corn June 18, and got started replanting soybeans, figuring 100 acres wouldn't grow a crop in 2008. Sadly, with about 10% of his acres under water, many Iowa and Illinois farmers with greater losses would consider him lucky.

The real irony: on average, Shaner's crop is just fine. Cool, wet early summer weather produced a stress-free growing environment on his well-drained higher soils. Increased yields there will likely off-set what he lost to flooding. Yield goals of an average 160-bu. corn and 40-bu. beans still seemed practical post-flood, even though in mid-June his corn was two weeks behind normal and soybeans nearly a month.

Early sales. It's a crop that Shaner began to sell in 2006. "I sold some corn then on a hedged-to-arrive contract at $2.92. Probably less than 5% of the crop," he says. "Then in December 2007, I sold another 5% or 10% at $4.50."

In April 2008, as markets surged, Shaner fenced his price on remaining corn with a $5.50 put and a $7 call. "The bean market was tanking right then, so I just bought puts at $11.40.

"At the time, it looked like the corn market could go back to $3 quickly," he says. But as markets kept seeking the top, he liquidated his positions. The position cost 80¢ for the soybean puts and 61¢ for the corn fence.

With his crop finally in, Shaner put his sales on hold. "Any price north of $3 makes us money on corn," he says. "And I think I'm smart enough to figure out a way to sell before it goes back to $5. I may be naïve, but I really don't see any reason for the market to drop at this point."

Shaner doesn't plan to sell any 2009 or 2010 crops soon, either. "There's really no reward for selling right now," he says. "Input costs are all going up. If I can't forward price inputs, why forward price the crop?"

Cash sales. Aurora, Neb., farmer Brian Wall locked in profits with forward cash contracts. Wall, who farms with his father, Dennis, and brother, Kevin, started selling 2008 crop in the fall of 2006 at $3. "That was 90¢ above prices at the time and looked like a heck of a price."

Wall's marketing plan calls for selling grain in 5,000-bu. increments every time prices rise 50¢ to $1. "Every sale today will be a mistake tomorrow, if the market goes up," he says. "I keep making mistakes. But, at $5, it sure looked like a mistake to do nothing." By late June, Wall's top corn sale was a cash contract at his local co-op for $7.50.

Those sales put his 2008 crop at 40% sold, well within his plan to not sell more than 50% before July 4. He also sold some 2009 corn at $4.50, before market forces closed the door on local cash sales for 2009's crop.

Options can also protect his downside, but Wall isn't sure the price protection merits its cost. However, he admits his resistance has limits. "If corn hits $10, we'll probably protect the price with puts," he says.

Based on input from two consultants and his own daily information gathering, Wall gives bids to elevators to sell at his specified price. If not filled in two weeks, the bids expire. "It takes a lot of emotion out of marketing," he says.

Proactive. "You need a proactive marketing plan that allows you to control your bottom line," says Todd Gerdes, specialty grain manager at Aurora Co-op. "Just because what you did earlier in the season doesn't look as good now as it did then, doesn't mean you should turn away."

Who would have thought farmers might contract corn at $8 and worry it was going to $10? "You have to be careful you don't end up looking at the stars and forget your feet are on the ground," Gerdes says. "Today's price levels are profitable. So don't worry about waiting to sell 50¢ from the top," he says. "You don't know where the markets are going to be four months from now."

Like many elevators, the Aurora, Neb., Co-op offers over-the-counter contracts similar to options, except they're slightly less expensive and they expire closer to harvest.

Gerdes encouraged farmers to consider a fence, to protect price and decrease costs. "In late June, you could buy a $7.60 put for 80¢ and sell a $9.45 call for 25¢, so your net cost was 55¢," he explains. "That locks in a minimum price of $7.05." Should prices exceed $9.45, the buyer of the call could exercise it and you would enter a short hedge in the futures market.

Opportunity. Next year may hold opportunity for growing specialty grains. Record-setting commodity prices have made the end users of value-added crops "uncomfortable," Gerdes says. "A 50¢ premium in a $7.50 corn market doesn't look as good [to producers] as it did when corn was $2.50. I look for the value-added market to adjust for 2009 in order to keep acres."

One thing these Nebraskans all agree: No one knows where markets are headed and each producer has to adjust sales to meet his own risk tolerance and capture profit opportunities as they arise.

Market's Tough Spot

It is very difficult to know where prices will head next, notes AgStar Financial Services' Dennis Kelly in Mankato, Minn. "The market is so sensitive that any piece of news can take it much higher, very quickly. The supply of corn is in question with the flooding in Iowa and points south. Illinois and Indiana had a very wet spring also."

However, "it should be concerning to everyone that any change could send the market crashing lower also," he says. "Recent announcements of ethanol plants not opening and projects being shelved will change the demand for corn, and livestock producers could trim production.

"The market is really in a tough spot," Kelly sums up. "If prices do push higher, there will be a severe capital shortage and grain will not be bought as we are used to. Capital was short in the $5 to $6 range and we are pushing $8 corn and $15 to $16 soybeans. Margin, maintenance money and daily trading limits have all changed because of the high volatility of the market. If you think of the first sales you made, an elevator or grain company has been margining a position on that grain and will continue to do so until the grain is delivered and sold."

To contact John Russnogle, e-mail TopProducer@farmjournal.com.

Top Producer, Summer 2008

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