Consider Logistics in Pricing
Even before planting, make your plan for which bushels to price first, recommends Scott Stewart of Stewart-Peterson Group. "We often see producers forward price the wrong bushels,” he says.
For example, suppose you expect to plant enough acres to yield 100,000 bu. of corn and you have storage for 60,000. "Price the 40,000 you don't have a home for at the first opportunity—not bushels you want to deliver out of home storage in March, May or July,” Stewart says. "This will avoid either dumping some of your crop during harvest or putting it into expensive commercial storage.
"Separate your futures and basis decisions. Even if you don't price the fall-delivery bushels in the cash market, hoping basis will improve, a hedge can boost the price you receive,” he says. "So as you map out your pricing components, figure out your logistics component at the same time.” —Linda H. Smith
Key Market Factors
> Highs may be in unless March reports deliver surprises
> South American beans hit the market
> No acreage battle needed
> Fewer livestock mouths
Click here for the Adviser Track Records table (Percent Sold and Market Value on Feb. 2, 2010)
Premiums for Quality
If you have high-quality corn in your bins, shop around for premiums, recommends Mark Gold of Top Third Ag Marketing. "This is especially true where harvest was delayed and grain was damaged, either by drying or by mycotoxins. Elevators will be looking for high-quality grain to blend off less desirable grain,” he says. —Linda H. Smith
Where to Sell This Year?
It may not be business as usual when it comes to marketing this year, cautioned participants in the "U.S. Farm Report” taping at the Top Producer Seminar. Some buyers are placing limits on how much you can price ahead, complained "U.S. Farm Report” host John Phipps, who farms near Chrisman, Ill. "When my advance sales hit 50%, my elevator got edgy and didn't want to price more. I have never reneged on a contract, so they shouldn't have any reason to believe I would this year. Not only that, but how would they know I didn't sell the other 50% at another company?”
At the same time, bankers don't want to lend you operating money unless you have a marketing plan, said Jerry Gulke of the Gulke Group. "But then they are worried about how much they might have to put up for margin calls on hedges,” he added.
"If banks and elevators don't want margin calls, why would farmers?” countered Mark Gold of Top Third Ag Marketing. "That's why I prefer long put options. You can estimate premiums and make them a line item.”
Actively manage your basis risk, too, Gold said: "Track it every day. For example, if we see planting or summer weather worries and basis tightens to –30¢ for harvest deliveries, why wait until it's –70¢?” —Linda H. Smith
New Cargill Cash Contract
Cargill's Premium Average Contract allows you to enhance your grain price in exchange for a firm offer to sell more grain for deferred delivery. You choose the firm offer price and averaging period, which determine the premium you receive.
Jennifer Kazin of Cargill Risk Management gives this example: You enter a Premium Average Contract to sell 10,000 bu. of corn for September delivery at $4.50. You receive 30¢ per bushel more than the current $3.90 bid in exchange for a firm offer to deliver an additional 10,000 bu. of grain for October delivery (the following crop year), if the February average for December futures (crop insurance base price) is above the $4.50 target futures price.
Regardless of what prices do, your final futures price for September-delivered corn is $4.20 ($3.90 local cash bid + 30¢ premium). If the February average of December futures is below your target futures price, you don't have to deliver the firm offer bushels and you have the rest of the growing season to market them. If December futures rally above your target, you are obligated to deliver the firm offer bushels at $4.50. In this case, your crop insurance revenue guarantee would be higher as well, offering protection in case of crop shortfall. —Linda H. Smith
Top Producer, March 2010