Roll Three Years into One

April 1, 2014 09:38 PM
Roll Three Years into One

Consider selling not only 2013 and 2014 corn soon, but 2015, too

By Ed Clark and Sara Schafer

In the brave new world of corn marketing, don’t stop your efforts at fall 2014 but consider 2015, too, analysts suggest. "I have $4.95 per bushel offers for December 2015 corn futures on the board, and I think we’re going to get it done," says Anthony Brooks, an Avon, Ill., corn and soybean farmer. That means he’s selling the rest of his 2013 and unsold 2014 in addition to 40% of his anticipated 2015 corn production—all by the first of April.

Brooks’ read of the markets suggests that December 2015 corn futures could drop into the $3.50 to $4 per bushel range if the 2014 corn crop is a good one. With breakeven in the $3.90 range, that locks in a 2015 profit of around $1 per bushel.

While Brooks often prices corn three years out, he employs a one-year-out approach for soybeans. For example, he sold 100% of his 2014 anticipated soybean production this past June and July at $14.90 per bushel. "That feels good," he acknowledges. He also sold 45% of his 2014 expected corn crop then at $5.15. 

Some think Brooks is onto something. "We have to look at 2015," says Randy Martinson with Progressive Ag. With a good crop in 2014 and the potential for bearish feed and ethanol demand, downside risk for the 2014 crop is $3.35 per bushel and potentially $2.45 for 2015, he says. "Carryover this fall could be as much as 2.3 billion to 2.6 billion bushels." 

"Marketing 2015 corn now is not a ridiculous thing to be thinking about," adds Ed Usset,University of Minnesota ag economist. Given the possibility of sub-$4 corn, he says marketing up to 30% of expected 2015 production is a viable option, but probably no more than that.  

Some are more cautious. "A lot has to happen to get to worst case," says Cory Walters, University of Nebraska ag economist. Yet for the risk adverse or those with high debt levels and low working capital, he says selling up to 10% of anticipated 2015 corn production soon could be a smart move.

One reason why he’s less concerned about extreme downside risk is that if corn prices slip much below $4 per bushel, farm bill provisions—namely Agriculture Risk Coverage and Profit Loss Coverage—kick in. He acknow­ledges, however, that low corn prices could be the undoing of crop insurance guarantees.

"Next year’s crop is too far out to feel real comfortable doing a lot with," says Bill Biedermann with Allendale. "I wouldn’t want to go with more than 40% to 50% of expected production." For producers wanting to get some on the books for 2015 at current prices, he suggests an options parameter, locking in both a floor and ceiling with puts and calls that keeps options affordable. Such a strategy could provide a $4.80 floor and a $5.60 ceiling. 
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Corn prices are heading lower the farther out you go, which leads some to think that booking a portion of your 2015 crop soon isn’t a bad idea. Prices shown are as of March 2014.  Source: Chicago Mercantile Exchange and Iowa State University



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