This past year turned out to be quite the roller coaster ride. Some farmers experienced drought, which was followed by flooding and then returned to drought conditions again. Many farmers struggled to get crops in and some did not, hence, the record number of prevented plant acres reported. Despite all this, we managed to grow record corn and soybean crops, thanks to superb management and superior genetics.
Throughout the roller coaster ride, price levels for most producers weren’t adequate to make sales with such uncertainty ahead. As a result, producers now have grain inventory levels higher than they’ve had in several years. In some cases, producers are sitting on more grain than they’ve ever had.
Scale Up. This massive inventory along with lower prices has already sparked export demand. From a long-term perspective, continued lower prices will only help to rebuild lost demand. However, marketing will not be as easy as it has been the past several years. So what’s the solution to low prices and a huge grain inventory?
You alone are the only one with the correct answers to profitability as you wrap up the year. Every producer has a unique set of circumstances from which to make the best decisions.
"You alone are the only one with the correct answers to profitability as you wrap up 2013."
Let’s look at basic factors that need to be considered as we put a bow on 2013. Final yield, local basis, insurance indemnity, flat price and market carry should all be considered
as you structure your plans for profitability.
First, calculate your exact inventory amount. Let’s assume you have 100,000 bu. Think of those bushels in terms of percentages. Next, decide what percent of those bushels you’re willing to sell at a time. For example, if you want to sell 25% per sale, you know that when you make a sale it will be 25,000 bu. This gives you four individual decisions to make, which will help you focus on price and profit rather than how much you’re selling each time.
Basis is the next consideration. Talk to your local elevator or processor to find out when they are in most need of the physical grain. Make sure the location that you plan to deliver the grain to knows how much you have available and at what basis level you are willing to part with it. If you’re willing to deliver the grain when the elevator or the processor is asking for it, you could easily capture a premium.
Crop insurance should also be considered as we wrap up the 2013 marketing year. Producers with yields at near their Average Production History (APH) level will receive some indemnity payments due to the lower fall prices. The fall price for corn is $4.39, and for soybeans it’s $12.87. Depending on your coverage, you might or might not receive an indemnity payment. Let’s assume you receive a total indemnity payment of $30,000. Once you have your total indemnity payment, divide that number by your total production. For example, $30,000/100,000 bu. = 30¢ per bushel. Calculating the per-bushel value of your indemnity payment let’s you add it to your flat price.
Now take a look at your flat price opportunity and the carry in the market. Determine a "realistic" price objective where you would be willing to make sales. If these price levels are not satisfactory,
discuss it with your marketing adviser and look at purchasing call options or possibly re-owning some of the sales with futures.
Wrap up 2013 decisions and transition your focus to 2014 as next year will be a whole new ride!
Chris Barron is director of operations and president of Carson and Barron Farms Inc. in Rowley, Iowa. He is also a farm business consultant and the author of the AgWeb.com blog, "Ask a Margins Expert." To submit questions and comments, e-mail Chris at firstname.lastname@example.org.
- December 2013