The markets are a lot like a volcano: There may be some dull rumbles that make a few people wonder what’s going on, but all too often prices move suddenly, taking most people by surprise and demolishing the best-laid plans.
In fact, the price collapse for 2009 crops buried many growers in red ink, based on estimates by Gary Schnitkey, University of Illinois Extension economist. Non-land production costs for 2009 were a record $533/acre for corn and $291/acre for soybeans. Based on yields of 192 bu. and 55 bu., respectively, net returns including labor, capital and management were –$29/acre for corn and $66/acre for soybeans. "This was the first time since 2003 that corn returns were below soybeans," Schnitkey says.
Schnitkey used $3.52 and $9.80 prices for corn and soybeans. The advisers we track averaged $4.20 and $10.37. That would have added $130/acre to corn returns and $31/acre to soybeans. EHedger, the top corn marketer, achieved $4.78—$242 more than Schnitkey’s estimate—and Progressive Ag Marketing’s $12.81 soybean price would have boosted return by $166/acre.
Their routes to top adviser status were quite different, bearing on the fact that there is no single way to deal with volatile markets. "We were really aggressive early on," says Justin Kelly of EHedger. "Prices provided growers with good profits, while many end users’ margins were negative—a situation that wouldn’t last."
In general, EHedger likes to recommend cash sales because they are less capital intensive, Kelly says. It recommended a 10% cash sale on Dec. 18, 2008, followed by 25% on April 7, 2009, and 10% on May 21. These three sales gave it 45% sold at $5.37 based on EHedger methods. The remainder was sold between Oct. 23, 2009, and June 23, 2010, for a final cash average of $4.34, the highest of any adviser. To this, it added 44¢ from options.
Progressive Ag Marketing also started pricing early. "We recommended 2009 hedges during the rally in 2008," says manager Randy Martinson. "We watched the corn-to-bean price ratio to figure out what would be planted and flipped back and forth, pricing one and then the other as the ratio changed. We took profits on those hedges when we felt the market had fallen as much as it was going to." The price ratio keyed additional sales. "We recommended sales when good returns were available to farmers and we felt the ratio was out of whack," Martinson explains.
Progressive Ag uses hedged-to-arrive contracts. Because the basis isn’t locked in until the contracts are converted to a cash sale, they are treated as futures sales and their value relative to the market shows up as future profits or losses.
Progressive Ag converted all its soybeans to a cash sale on March 5, 2010, at a cash price of $9.16. Adding $3.78 made in futures and subtracting a 13¢ options cost netted $12.81/bu.
The 2010 Crops. "The market now reminds me of 2007/08," Kelly says. "The lower prices we saw built strong demand. Now there is some concern about supply and the market is putting in some pretty high premiums. If yields do drop, negative margins for end users could return. In that case, we will get even more aggressive, aiming to sell before demand destruction occurs."
"On soybeans, $9 cash or about $10 futures was our early target and we started pricing there," Martinson says. "But we didn’t want to sell too much ahead of August weather. Now, storage prospects are better for corn than beans."
Bullish 2011. "December 2011 corn is our favorite contract of all the grains," Kelly says. "If yields drop this year, prices will have to ensure enough supply next year. But the peak could be early if prices rally enough to buy more acres and we get larger supplies at the same time we kill demand."
EHedger sold some far-ahead call options to take advantage of the time value and capture the 50¢ to 60¢ premium. "We have good leeway on these," Kelly says. When you sell a call, you can buy it back as time value erodes and premium drops or, if it is exercised, you enter a short hedge in the futures market."
"We have no sales on 2011 beans yet," Martinson says. "There hasn’t been a huge incentive to price. We’ll probably start at the same time we sell the last of our 2010 crop."
Focus on Profits. It’s tough to know from one day to the next what prices will do and even more risky to wait for the volcano to blow—then it may be impossible to move fast enough. Last year’s corn price ranged from $3.03 to $6.29 and soybeans from $7.56 to $14.70. USDA’s national average cash price implies that many producers failed to capture those opportunities.
Advisers recommend focusing on protecting profits when they are available. You may leave money on the table, our Adviser Track Records show, but not as much as the national average cash price implies farmers did in 2009. And you won’t go broke locking in a profit.
Top Producer, October 2010