Don’t Give Away Your Risk Premiums
Market Commentary for 1/19/24
There is simply too much corn in the US this year. Production issues in Mato Grosso in April or May or in Iowa and Illinois in July are most likely the best chance for significantly higher prices.
Don’t Give Away Your Risk Premiums
Growing specialty corn (i.e. seed, white, non-GMO, high oil, silage, etc.) is popular with some farmers because there is usually an added premium to grow any corn not used for feed, export or ethanol. There can be several reasons for the premium:
- Proximity to a specialty corn buyer
- Risk of a potential yield reduction
- Increased weed treatment and/or insect cross-pollination
- Need for additional storage for identity preserved crops
- Harder to replace if there is a production issue at a local level
Most farmers do not want the hassle, or risk, of raising these crops. That is why there are big premiums. If everyone was doing it, there would not be a premium.
While there is some opportunity to increase profits raising specialty corn, I have noticed many farmers make marketing decisions that leave money on the table. Let me explain.
Most farmers set a cash price for their specialty crop first. Often, they will get excited about a much higher cash price during the winter or spring months when traditional #2 yellow corn prices are suppressed. They may see an 80-cent premium to yellow corn and want to lock it in early because the cash value looks so much better.
The problem with this strategy is the farmer is only looking at the cash price and not the risk for raising the specialty crop. Instead, I prefer to subtract the premium of the specialty crop out and then apply the basis value of yellow corn to compare. If I would not sell yellow corn at that price, then I would not sell my specialty corn at that time, even with the added premium.
When outlining a marketing strategy, I recommend that farmers, who raise more than one type of corn, to pool together all their specialty and regular bushels in one “marketing basket” when looking at the underlying futures position. Then when a futures price meets my profitability goal criteria, I would sell.
I would also suggest using futures to hedge both kinds of corn, so I have flexibility to apply any futures sale on my crops later based upon shipping and logistical needs. For example, this could be on yellow corn that needs to be delivered at harvest due to limited storage because of increased specialty crop storage needs.
Too often I see farmers, who do not have any of their #2 yellow corn sold by harvest, end up selling it for very low values or paying a lot of commercial storage because they were only focused on selling the specialty crops. These farmers then miss opportunity on their #2 yellow corn because they didn’t plan ahead for all their storage needs.
I prefer to think of the specialty crops in my marketing plan as a way to get additional basis premium for the increased risk to raise the crop. At the end of the marketing year, I can add up all the corn futures sales together to determine my average. Then I can add the specialty crop premium to each line item. When all the corn raised by a farm operation is based on the same futures, it is easier to calculate and compare the basis premium. In the end, all that matters is both crops were profitable.
Bottomline
A good rule of thumb for me...if I would not set #2 yellow corn futures price right now, then I would not be pricing my specialty crop futures either. Raising specialty crops can be risky, so I do not want to give away any risk premium just because the cash price looks good today.
If you would like to talk about ways to better sell your specialty crops, reach out to me at jon@superiorfeed.com.
Want to read more by Jon Scheve? Check out recent articles:
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