Scheve: What Price Level Should a Farmer Start Marketing Their Grain?
Jun 04, 2018
Market Commentary for 6/4/18
Weather forecasts are positive and crop conditions are favorable. Trade issues are still completely unknown. Dec corn has had a 25 cent trading range in the last 10 trading sessions. For the next 45 days I think weather will still be dictating prices.
Two long-standing orders for my 2018 anticipated corn production against the Dec’ 18 hit last week.
- 5/22/15 – 5% Sold - $4.25
- 5/24/18 – 10% Sold - $4.28
Current 2018 Corn Position
With these two sales, just under 40% of my ’18 anticipated production is sold at an average price of $4.22.
I have additional option strategies that depending on where corn prices are in late November could add additional sales to my ’18 crop:
- Over $4.20 – 20% more sold at $4.20
- $3.60-$4.20 – 10% more sold at a level between $4.20 and $4.40
- Below $3.60 – No additional corn sold
What Price Level Should a Farmer Start Marketing Their Grain?
I attended a grain marketing seminar recently when a farmer in the audience asked the presenter at what level he should start making sales. The presenter said he couldn’t say without knowing the farmer’s breakeven point. I then quickly asked, “Are you saying that a farmer with a $3.90 breakeven should have a different marketing strategy than a farmer with a $4.30 breakeven? If so, what would be the difference?” The advisor, realizing the flaw in his answer, ultimately never answered the question.
Many advisors recommend that farmers know their breakeven points and scale sales up from there. While I’m a huge proponent of farmers knowing their true break even points and believe it’s absolutely essential when developing a grain marketing strategy, this information alone isn’t enough to build a solid grain marketing foundation for making marketing decisions.
Following Provides A Real Example That Illustrates My Point
In 2017 I knew 2 farmers living 75 miles apart. In January both did their budgets assuming normal yields based upon APH yields from their insurance records. Their breakeven points were within 2 cents of each other at $4.15 Dec futures. Once harvest was complete in the fall, Farmer A harvested his worst crop ever with only 50% of the budgeted number of bushels, while Farmer B harvested 25% more than budgeted. This meant Farmer A’s breakeven point increased nearly $2/bu to about $6/bu. Farmer B’s breakeven decreased $1/bu to about $3/bu. Regardless of Farmer A’s marketing strategy, he never had a chance to make a profit, while Farmer B didn’t have to have a strategy to make a profit.
It goes without saying that weather and final yield result uncertainty are the hardest things that farmers have to deal with in maintaining a profitable farm operation year after year.
So, Should Farmers Wait to Sell Until After Harvest Once Final Yields Are Confirmed?
I don’t think it’s usually in farmers’ best interest to wait until after harvest to sell because historically the best futures levels usually (but not always) occur during the middle of summer. Plus, farmers can take full advantage of market carry, which is only available if they've sold their corn by harvest.
So, How Do Farmers Manage This Yield Uncertainty?
There are a lot of passionate opinions on social media alone on this subject. My philosophy is - I can’t predict when times will be good or bad, so I just plan for a normal or average year. That way I bank the extra profit in the good years and pull from that reserve during the bad ones. Over time farmers who assume normal yields and weather in their marketing plans will fare better than those that try to predict the weather and their yields.
For Farmer A it was a year of trying to lose the least amount possible. In the end, Farmer A was happy to get $4 for their ’17 crop, because many farmers nearby him complained of only getting $3.60. Farmer B, who also averaged $4, realized their good fortune from their yields, and put some of the additional profits in savings for a future dry year that is inevitable. They were extremely happy to have sold corn for $4 instead of $3.60 as well. For farmer B it was all about maximizing profits last year.
Breakeven Points – Additional Considerations for Farmers
First, farmers need to know their TRUE breakeven point. This value should include fair market rental value for the land they own, a cost of living expense, and custom rates for their equipment to minimizing “fudging” on depreciation and repair costs. All of the other variable costs are pretty straight forward and easy to budget.
Next farmers should also consider their breakeven point in relation to other farmers across the country (not just locally). I rely on several different University studies to help me compare my breakevens to other farmers. I feel that if my breakeven points are way below these estimates, then I’m not being aggressive enough with my farming practices or marketing. Conversely, if my breakeven points are higher, then I’m likely either not efficient enough or I'm being too aggressive with risk levels in my marketing.
In my experience, farmers who don't compare their breakeven to others and estimate too low will often market their grain too early or too low and miss out on their full profit potential. When farmers' breakeven points are higher than average, they risk never having a chance to sell their grain at profitable levels. These farmers might want to find ways to reduce costs rather than hope for significant rallies to make up the difference.
With this information, I have a good foundation to maximize my profit potential and can then develop a solid grain marketing strategy. The market generally trades at some point in the year at or above average farmer breakeven points, so I want to be ready for that price level and have a portion of my grain sold when that happens. Then I can scale up my sales beyond that value within my marketing strategy.
Superior Feed Ingredients, LLC
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