Selling the Weather Rallies
By Steven D. Johnson, Ph.D. | Farm Management Specialist | Iowa State University Extension
Spring 2018 Crop Marketing Quiz
Dry conditions in Argentina reduced the size of corn and soybean crops. During the 2018 late winter months, old crop soybean futures prices rallied more than $1.20 per bushel and new crop soybeans by more than $.70 per bushel.
Select the one best answer that describes your old crop marketing plan:
- A. Stop selling, wait to see how high futures prices rally and try to sell at the top.
- B. Rotate away from normal 2018 corn acres and plant more soybeans.
- C. Reward the rally, make additional old crop soybean sales, price a few new crop soybeans, but be reluctant to sell this early.
- D. Reward the rally, finish old crop sales and aggressively sell new crop bushels using revenue protection crop insurance as November soybean futures are above the projected price of $10.16 per bushel.
- E. Reward the rally, finish old crop sales using minimum price contracts should the futures price rally continue. Sell no new crop soybeans, as they seem too cheap compared to old crop prices.
There is no one right answer, but by the spring months you will know if your decision was the most profitable, as well as reduced cost and price risk. Expect tight 2018 profit margins for both corn and soybeans as U.S. ending stocks by August are forecast to be at levels not seen in decades. Spring and summer weather rallies in the northern hemisphere should be treated as opportunities to finish old crop sales and make additional new crop sales. This is especially true when using revenue protection crop insurance and new crop corn futures are above the 2018 projected price of $3.96 per bushel and $10.16 per bushel for soybeans, respectively.
Importance of a Crop Marketing Plan
Each year since 2010 farmers were able to pre-harvest market corn and soybeans during the growing season at prices much higher than those received at harvest. Thus, they could have delivered bushels at or shortly after harvest and avoided additional storage and interest costs on those unpriced bushels in storage.
Procrastination and the fear of being wrong are probably the primary reasons farmers don’t sell the weather rallies. An initial effort to avoid these mistakes include knowing your cost of production for new crop bushels and determining your cost of grain ownership for bushels stored after harvest. As long as cash flow demands are met and the storage space is not needed, doing nothing might seem like a logical plan. However, having a written plan develops both a purpose and accountability to market that grain and can help align cash flow needs. Storage and interest charges are not free and many farms are challenged by their ability to find profitable margins. Holding multiple years of corn or soybean crops can lead to the erosion of valuable working capital (current assets minus current liabilities) that can then lead to the need for restructuring debt into the environment of higher interest rates.
Five-step Marketing Plan
Consider these five primary steps when developing your written marketing plan for both old and new crop bushels.
- 1| Cost of production, cost of grain ownership (post-harvest) and/or reasonable profit margin
- 2| Price objectives (both futures and cash prices)
- 3| Time objectives (identify specific decision dates, especially the spring months)
- 4| Marketing tools (utilize hedge to arrive [HTA], hedges, put and call options, as well as basis and minimum price contracts)
- 5| Identify your reasons for taking the marketing action
Individual cost of production for growing crops will vary greatly by farm and be highly dependent on the final crop yields. The use of revenue protection crop insurance mitigates a large portion of both the yield and price uncertainty for marketing new crop bushels. Consider using your actual production history (APH) as your best yield estimate prior to pollination and grain fill.
Once the crop is harvested and stored unpriced, grain ownership reflects both the cost of storage and accrued interest charges. On-farm storage costs would typically be lower than those in commercial storage. This assumes that the grain bins on-farm are paid for. Having the bushels stored on-farm can lead to more choices in determining the best cash prices and where to deliver those bushels. Building new grain storage and making principal payments can use up valuable working capital.
Price objectives reflect both the futures price and cash price you are willing to receive. The difference between these two prices is called basis. Basis reflects local supply and the demand for that crop. With large old crop supplies readily available throughout the Corn Belt, basis will tend to be wider or weaker than normal after the spring months. The 2018 weather concerns will likely need to cover a large geography of the U.S. and/or China to see significantly higher futures prices beyond the spring months. Consider the use of hedges or hedge to arrive (HTA) contracts for selling new crop bushels, as the basis for fall delivery will likely stay wider than normal and an abnormal number of bushels are moved in late August and September.
Time objectives should reflect the seasonality of both futures as well as cash prices. Corn futures prices tend to rally in the early spring months and peak by late June or early July. This reflects the period of the greatest uncertainty of production for a crop produced primarily in the northern hemisphere. Soybean futures prices move higher in both the late fall and winter months when southern hemisphere production is threatened. Then soybean prices typically rally again in the late spring and early summer months, reflecting uncertainty of production in the northern hemisphere.
Utilize a Variety of Marketing Tools
Farmers should use a variety of marketing tools to spread their risk and attempt to time sales to capture futures when prices are high and/or basis when it’s narrow. These events tend not to occur at the same time. So using only spot cash and forward cash contracts can have serious limitations. Post-harvest basis usually strengthens significantly by mid-November through Christmas for both corn and soybeans. Consider the use of HTA contracts, but the use of January soybean or March corn futures. The
combination of low futures prices and wide basis, especially at harvest, has created the need for more aggressive pre-harvest marketing strategies. Consider the use of a variety of marketing tools. If delivering bushels, include hedge-to-arrive contracts of selling cash and staying long futures with basis or minimum price contracts. You can then separate the decision to accept simultaneously both the futures price and basis using these tools. Should a farmer prefer to manage the futures price, yet not commit bushels to delivery, consider working with a broker and the use of futures hedges and buying put options.