Power Hour: Marketing Inaction Could Prove Costly in 2013

June 14, 2013 09:45 AM
Power Hour: Marketing Inaction Could Prove Costly in 2013

 Less than half the normal corn and soybeans had been forward priced as mid-June approached, and if reticence to pull the marketing trigger continues for long, it could prove a costly strategy, analysts say.

Lawrence Kane, Yates City, Ill., branch manager for Stewart-Peterson, estimates that nationwide, only 20% to 25% of expected corn and soybean production had been pre-sold as of June 11, compared to typical levels over time of 40% by that date.

For both 2013 corn and soybean crops, Kane recommends that by mid-June, farmers have 25% of their expected production sold with forward contracts, and 50% with put options. Normally, he recommends a 50/50 split. Of course, farmers need to ratchet down their anticipated yields a bit prior to marketing, given late planting, and for some, acres that could not be planted.
Four key factors are responsible for discouraging farmers from pre-selling this year, in Kane’s view. One is that last year’s drought had many producers concerned about 2013 production. Second is that for the past two marketing seasons, those who did no pre-harvest marketing of any kind came out ahead. "If you sold ahead you looked like a fool," Kane acknowledges. Last fall, corn could be sold out of the combine for $7.50/bu. "It’s important, however, for producers to understand just how unusual this is," Kane says. Year-in, year-out, farmers who pre-price their grain receive far higher prices than those who are tardy in pulling the trigger, he adds.
Third, the wet spring and accompanying production concerns have discouraged some looking at mud holes in their fields from marketing 2013 production just yet. Lastly, and perhaps the biggest reason of all, farmers have had difficulty making new crop sales with the more than $1 spread between old crop and new crop. On soybeans, the spread between July and November futures is an even wider $2/bu.
"Farmers need to understand, however, that the market doesn’t care about your field or your neighbor’s field. It focuses on global supply/demand factors," Kane says. And global production of both corn and oilseeds is set to rebound substantially from 2012 levels.
Are any innovative marketing tools and strategies in your marketing toolbox that are tailor made for a year like 2013? In Kane’s view, while not new and not innovative to those who already use them, options are one such tool. "Options offer flexibility for a year like 2013."
On June 11, an in-the-money December corn put of $5.50 could be purchased for a 35 cent premium, guaranteeing farmers at least $5—factoring in typical basis—for their corn. That hardly seems like a windfall compared to last fall’s $7.50. But $5/bu. this fall is about 50 cents higher than the $4.50 harvest price Kane is fearful of. That assumes a more typical weather pattern this summer. The wet spring has added about 50 cents to the market over the past three weeks, and he thinks that’s likely to hold, so he no longer expects harvest corn prices to be as low as $4, which some analysts earlier had predicted.
Wet springs do not necessarily hurt production all that much. "The poster child for a wet spring is 2009," Kane says. That year, conditions were wet with major planting delays. "But we ended up setting yield records." As a result, corn prices in 2009 crashed and crashed hard, all the way to $3.50, roughly half where they had been just a year earlier.
"You need a marketing plan that’s flexible for whatever kind of year you have and that’s why I like options," Kane says. However, he estimates that only about 15% to 20% of producers nationwide use them.
"Soybeans look scary," Kane adds, and offer an even better reason for producers to use options now. Here’s why: global soybean and for that matter all oilseed production is expected to rebound considerably this year, with the first sign a huge South American soybean crop. Not only did that region have a huge harvest, for the first time in a long time, they likely will end up with a carryout, he believes.
"I can see soybean prices with $10 in front of them within the next six months," Kane predicts. Because of that, he advises U.S. growers to lock in prices for 50% of anticipated production now with $13 in-the-money put options for the November contract. The premium is 60 cents per bushel right now, a bit spendy perhaps, but soybean options could end up being cheap insurance if prices crash nearly $3/bu. between now and November. Kane firmly believes that is in the world of the possible.
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