For this hypothetical plan, we have come up with four distinctive marketing strategies that will be compared in our monthly statements in our blog:
Strategy #1 - Plant, Harvest and Store.
As we previously mentioned, December 2014 corn is trading well below the cost of production while the current July 2015 futures is trading at $4.6925 around $.61 below the 5% profit margin. In this strategy the producer would not purchase crop insurance. The crop would be harvested and stored to July 15, 2015. An estimated storage cost of $.05 per month would be incurred from October 15, 2014 to July 15, 2015 or $.45. Production costs would be $4.85 plus $.45 storage cost giving a total cost of $5.30. I know some will be saying they have on farm storage and do not need to include storage costs but in this case we will.
With this strategy, in order to make 10% above cost, sales would have to be made at or above $5.83 basis the July 2015 corn contract. Unless a weather event is seen during the spring planting season or at pollination, it may be difficult to see this level; therefore at this time it seems that this strategy may not be that profitable and more than likely it may just breakeven.
Strategy #2 Purchase Crop Insurance, Plant, Harvest and Store.
This strategy is the same as above except crop insurance will be purchased at a cost of $.20 per bushel. The production cost now rises to $5.50 but in this case, compensation will be made if prices go below insurance levels. With this strategy your downside risk is protected and one can take advantage of any upside price move because the crop is in storage and not priced.
Strategies #1 and #2 are pretty basic and limited as to the amount of profit/loss to be made throughout the marketing season. The decision as to when to sell the cash hedges based on July 2015 corn futures has to be made. One can wait to see if a weather event is seen this summer, a bounce into spring 2015 or in July 2015 upon delivery. There is no use of the futures markets so the only loss will be if the desired target price is not seen and production costs in either strategy is not covered.
On Friday we will lay out the final other strategies and discuss revenue enhancement. Revenue enhancement refers to trading the market with strategies designed for minimal risk while attempting to enhance revenue by one to two cents after costs each month. One must always remember there is a risk when trading the markets and our strategies may not always work, but this strategy will be discussed in detail at a later date.
If anyone feels they need to put structure into their risk management decision-making and would like to discuss marketing strategies, call Bob or Laura (1-800-832-1488). We will also try to answer questions in upcoming blogs and we welcome emails to [email protected] or [email protected].
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