The 2007 crop year was one for the record books. We logged new highs in the size of the corn crop, corn and soybean prices (futures, cash and national average cash), price ranges, trading volume/open interest and net cash farm income, just to name a few.
Marketing advisers in our Track Record also captured record sales prices. The top market value was $4.80 for corn and $11.18 for beans, captured by AgResource Company.
It's likely farmers and grain elevators paid record margin calls as well. That's one reason AgResource's Dan Basse, traditionally one of the most aggressive users of futures, decided to go back to basics, focusing on cash.
"He had some effective cross-hedges early in the marketing year that had positive results,” reports Scott Harms of Archer Financial, who trades the advisers' recommendations for clients. "But for the most part, he kept hedge positions somewhat light as the market worked higher in the first quarter of 2008. The bulk of his cash sales for both corn and soybeans were made in mid-May through June '08.” The result was a commendable $5.38 cash corn and $13.57 cash soybean price average.
It's good he lightened up on futures, because they still cost him 75¢ in corn (partially offset by options gains) and $2.39 in beans (table below).
"Frankly, despite my expectation that markets would be volatile, I was surprised by how high we went,” Basse says. "I think we'll continue to see big price swings up and down. I view helping producers manage emotions and stay out of trouble as my biggest job this year.”
That means watching a new set of price indicators, Basse says. Supply/demand isn't as key to prices as it once was. "I am more acutely aware of the commitment of traders' reports and technicals, for example,” he says. "Currency moves also cause volatility. And the correlation between crude oil and corn prices now is 72%, so it's critical to watch oil. If it eventually rallies to $150/barrel as T. Boone Pickens predicts, corn will rally too."
High-risk game. With variable cash costs of about $480/acre for corn in central Illinois, there's little room for false steps in 2009, Basse points out. "Some growers are piling on $400 cash rent. So they are risking $820 to $860/acre to make a potential $40 to $45/acre profit—about a 5% return. The pressure is really on.”
You have to be a businessman and lock in your margin on part of your crop, he urges. "On the other hand, don't get too aggressive—it's not the 1990s, when you could forward sell two or three years' crops.”
Safe route. Three-dollar swings in corn and $6 to $8 in bean prices take a heavy toll on farmers' emotional state as well as on farm income, Basse says. Cash sales offer safety. "It's the way to sleep at night and manage in this atmosphere.
"Futures margin risk is too high and options are expensive,” he says. "We'll focus on rewarding the market for the three or four good pricing opportunities we expect in each 18-month crop marketing period.”
In fact, at only 10% sold in 2008 crops, Basse admits he is behind schedule on this year's cash sales. He made the corn sale at $4.82 and soybeans $11.66.
In comparison, Richard Brock has the top corn cash sales price thus far, with 40% sold at $7.09; Progressive Ag Marketing is 40% sold at $6.24. Stewart-Peterson Group has the most cash corn sold: 65%, at $4.21. For the full table showing 2008 sales as of Nov. 1, see www.TopProducer-Online.com, Track Record.
For 2009, Basse says, "We'll sell 30% to 40% before planting and ratchet up as fundamentals firm up. It is still hard to sell more than 40% before planting. If there is any weather trouble, prices will take off, given the relatively small stocks cushion.”
The only advisers who have recommended cash sales for 2009 crops are Stewart-Peterson, which has 20% of corn sold at $5, and Top Farmer Intelligence, with 20% of corn sold at $5.04 and 25% of beans at $12.52. They typically recommend many small cash sales.
Of course, some producers have found cash contracts for next year hard to come by. At the height of last summer's strong prices, many elevators wouldn't offer them.
Producer tools. In an october survey, Top Producer asked readers how often they use various pricing tools. Flat-price cash forward contracts are the most popular, with 64% using them always or frequently and 29% occasionally.
Spot sales are used always or frequently by 36% of the farmers. Another 53% use them occasionally.
Other elevator contracts, such as hedged-to-arrive, minimum price, etc., drop to 25% for the always or frequently used categories and only 13% say they use basis contracts always or frequently.
Sales out of home storage also are very popular, with 88% doing so.
In contrast, only 40% to 50% ever use futures or options.
Common mistakes. Asked about marketing mistakes they make, survey respondents say the most common are believing the market has to give them at least their cost of production (12%) and storing crops without protecting the future price (11%). Ten percent say they neglect to price when the market is falling because they hope it will rise.
How Advisers Do on Average
This is the first time advisers' corn results started with a "4” and beans with a "9”. Had you signed up to have your crops sold in equal increments by the advisers we track, you would have banked $4.29 for your corn, versus the $4.20 national average cash price reported by USDA. Advisers did slightly worse on soybeans, averaging $9.70 compared with USDA's $10.15.
Keep in mind, however, that we apply a storage and opportunity cost to sales. If an adviser sold corn from storage—say April 18, for example, 6¢ would be deducted from the central Illinois cash price that we use for cash sales. USDA averages prices from across the country with no adjustment for cost of storage.
"The important number to compare advisers' results to is your own sales price,” adds Scott Harms of Archer Financial in Chicago, who makes sales for clients based on the advisers' recommendations. "If you were able to capture last year's best prices, maybe you did better than the advisers. But if you watched them go up and then come down, you may be better off seeking help on a portion of your crop. That's especially true when emotions run hot.”
Below are the yearly totals and five-year averages for the advisers we've been tracking for five or more years.
To contact Linda Smith, email LSmith@farmjournal.com.
Top Producer, November 2008