The Earlier You Talk the Better

June 30, 2008 03:27 AM
Linda H. Smith, Top Producer Executive Editor
Some of the marketing advisers we track and report monthly have recommended cash sales of up to 50% or even more of 2008 corn and soybean crops (see the June track record table). If you haven't already reviewed any forward contracts you have and you are in weather-affected areas, do it now.
"If a farmer comes up just 10,000 bushels short on his soybean crop and has to buy them in the marketplace to fulfill a contract, at $15/bu., that's $150,000—not exactly small change," notes Carl German, University of Delaware Extension economist. "If it comes to that, the sooner you talk with your banker, the better."
While crop insurance will cover some losses, its deductible means it never covers 100%. And even those with fall price options (Crop Revenue Coverage and Revenue Assurance) may fall short of the unprecedented price rally we have seen already due to caps on how much higher coverage can rise relative to the spring price. "Besides, if I use my crop insurance payment to buy out of a contract, what will I use to pay my operating loan?" asks one farmer.
Furthermore, "farmers really choked on the cost of crop insurance this past year," says Rodney Clark of CGB. "A lot of them wouldn't pay the price. Disasters like this year are not common, and after paying for crop insurance and not collecting for several years, it is easy to think you can get by without it."
The sooner you talk to your buyer, the better as well: In the past some elevators have allowed producers to buy out of contracts or roll them into the next crop year. If you work with a large elevator chain, you might also be able to negotiate buying bushels in an area where there isn't as big a shortage and you can gain a basis advantage.
"As we work with our farm customers on a daily basis, our farm marketers are having conversations with them to identify situations where, due to weather issues, farmers might find themselves in an oversold position," says Dean Grossman, vice president of sales and marketing for Cargill AgHorizons. "To date we do not believe this to be a common situation, but in those rare occasions, we want to identify potential issues as early as possible to put our customer and Cargill in a position to find a mutually agreeable solution."
If you believe prices will rise even more, buying a call option might be a surrogate for bushels you would have grown because they will rally with the underlying futures—but costly premiums mean the need for still more cash flow. "Buying shorter term options is one way to reduce premiums since they will have less time value," says Brian Grete, senior analyst with ProFarmer in Cedar Falls, Iowa. "But keep in mind they expire several weeks before their underlying futures contract."

You can e-mail Linda Smith at

This article appeared in the June 19 issue of Top Producer's Moneywise eNewsletter. To sign up for a free subscription, click here.

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