Harvest Time Grain Strategies
By Jon Day | Market Wise Ag Services
What to Do with Unsold Grain at Harvest?
The primary goal of your farm business is being profitable, so the first question to answer is, “Is it profitable to sell my grain out of the field?” We encourage our clients to have a “Revenue Per Acre” goal, which is yield per acre times price per bushel. Let’s say a farmer had a pre-planting revenue goal of $700 per acre that covered all costs and allowed for an acceptable profit. In the plan, the expected yield was 200 bushels per acre, so the price target was $3.50. When harvest arrives, it’s time to take the actual yield and calculate the price target. Fall actual yield equals 210 bushels per acre, so dividing $700 by 210 bushels per acre equals $3.33 per bushel price target. So if you can hit your target without taking the additional risk and expense of storage, you may want to sell off the combine and end ownership.
In addition, if you made sales at or above the original target, your needs might be even lower on the unsold bushels. Let’s take a look at someone who is 40 percent sold at $3.60. For example, 200 bushels per acre times 40 percent equals 80 bushels per acre sold times $3.60 equals $288 per acre of revenue already coming in toward that $700 per acre target, leaving a need for $412 more dollars per acre needed from the unsold bushels. So, if the yield was 210 bushels per acre and 80 bushels per acre was sold ahead, then 130 bushels per acre is left to sell $412 divided by 130, equaling $3.17 to hit the target. If you can hit your target without taking the additional risk and expense of storage, you may want to sell off the combine and end ownership.
If you need a better price to be profitable, then you have several things to consider. Given the costs of commercial storage combined with the price risks, we don’t like putting grain unprotected in commercial storage. For any grain that won’t fit on the farm we suggest selling the grain and owning July call options. The strike price and premium need to be evaluated in real time. One simple guide for how much to risk on a call option would be to consider what it would cost to store grain in your local elevator from harvest until June 21, 2019, when the options expire. Then spend that or less for the option knowing that with the option that cost is the maximum cost per risk, where if you put grain into commercial storage you have the storage cost and the price risk as well.
For grain that you can store on the farm, there are a handful of choices. We’ll address three of them here.
- 1. Store grain on the farm with no price protection. This is the default strategy of many producers. This is the riskiest of the strategies. One has to be careful assuming the downside risk in doing this is limited. We discourage the use of the “store unprotected” strategy.
- 2. For producers with farm storage that have multiple destinations for their grain where they might have various basis bids to try and capitalize on, they can buy a July put option to create a floor under the grain and leave the basis and delivery destination open. This position leaves the upside open, basis open, while still creating a floor in the futures market. It’s very important to consider the cost of trucking when comparing basis bids. Our rule of thumb is the variable costs of trucking in a farmer-owned semi is $.042 per 10 miles one way. So if you are looking at bids in a 20-mile radius you need at least $.084 per bushel better basis to breakeven on that haul.
- 3. For producers who tend to take their grain to one elevator, they can “sell the carry” and buy calls. The carry can be sold using a hedge-to-arrive (also known as a no basis established contract) that locks in futures and leaves the basis open if your location has an unusually wide basis right now for June or July delivery. Or if the local basis is acceptable, then forward contract for June or July delivery. Then cover those contracts with call options to give yourself the upside.
The biggest drawback with the options is the June expiration. But at least by using them you get to June with limited risk and at that point future decisions could be made about rolling the options out to September.
Remember, it takes good crops in both the northern and southern hemispheres, to satisfy world demand.