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January 2, 2024
Could you make more money this year by pricing grain before harvest?
Pre- and post-harvesting plans are on the agenda at Farm Futures Business Summit, Jan. 9-11, where I’m speaking. Hot topics for the session include target prices, decision dates and pricing tools. When we dive into post-harvest plans, we’ll consider when and how to make it profitable to store grain.
For regular readers, preharvest marketing strategies from eight "celebrity producers" are well-known features of my Farm Futures column. While the characters are a product of my imagination, their marketing practices should look familiar to many readers. Some focus on price objectives, others on the timing of sales. Still others use options in pre-harvest pricing. All are focused on increasing profit.
Reviewing the celebrities’ strategies and comparing their performance over the past 35 years might help when considering preharvest pricing opportunities for the 2024 crop. What are the strengths and weaknesses in each approach?
Meet the characters: Which type of marketer are you?
The sources for the data come from Iowa average prices for cash corn and soybeans, as gathered by the USDA Agricultural Marketing Service’s Livestock, Poultry and Grain Market News, and reported by the Iowa Department of Agriculture and Land Stewardship.
All preharvest sales assume the use of futures or options contracts, based on prices from the Chicago Board of Trade. Futures prices are converted to cash prices using the basis at harvest.
This roundup generates a lot of numbers. When writing a preharvest marketing plan for 2024’s crop, consider these four questions:
1. Should I have a preharvest marketing plan? This question is the easiest to answer. Look at the results for Barney Binless, the only producer without a marketing plan. His harvest price was the lowest price in more years than any other player. His average price was also the lowest among the celebrities. Yes, everyone should have a preharvest marketing plan.
2. Do I need a minimum price objective? To answer, we need to compare and contrast the performance of our two best preharvest marketers, Aunt Tilly and Terry Timer. Their average prices are tops:
16 to 18 cents better than Barney’s harvest price for corn
27 to 36 cents better in soybeans
Tilly and Terry are timing-driven marketers — their preharvest sales are made from March to June each year. Their difference? Terry has a minimum price objective that is based on her breakeven production costs. In eight of the 35 years, Terry’s price was the same as Barney’s harvest price. That simply means that in those years, Terry’s pricing opportunities before harvest never reached her production costs, and she made no preharvest sales.
Tilly was active in every year. Sometimes it worked, but overall, Terry had an edge over Tilly. I am not comfortable pricing grain below production costs, and Terry’s modest edge over Tilly supports my bias. I’ll never say never to pricing below costs, but I think a preharvest plan should have a minimum price objective that is consistent with production costs.
3. How early should I start pricing new-crop grain? Justin Price will help answer this question. Despite beating Barney in more than half of the years, his average corn price is the same as Barney’s and just 4 cents better in soybeans.
Justin’s issue is his willingness to start too early and too cheap. His initial price objective is based on production costs. That’s a good thing, but his sole reliance on lofty price objectives late in the plan means he passes on good opportunities that Terry finds in the March-to-June period.
Too often Justin is stuck with one or two early and cheap sales, while later passing on good (but not great) pricing opportunities.
Darla also starts early but she mixes in Terry’s dates for some timing-driven actions in the spring. This improves her performance, but those “too early and too cheap” sales hold her back from being
a top performer.
Like Justin and Darla, am I willing to start pricing next year’s crop a full year (or more) before harvest? Yes, I am.
But to avoid their remorse of “too early and too cheap,” I will demand a premium for earlier sales of 50 to 75 cents better than my breakeven production costs.
4. Do options add value in preharvest marketing? Peter Paperfarmer and Uncle Buck are buyers of options. Peter re-owns sales with the purchase of calls, while Buck buys put options.
On the one hand, I am impressed that both players, on average, beat Barney’s harvest price. On the other hand, they do not do as well as Terry’s average price.
Buying options is often compared to buying insurance. Should we be surprised to learn that, in the long run, insurance costs money despite the occasional payout. (By the way, the modest difference between Peter and Buck can be primarily attributed to time value and different exit dates. Peter sells his calls in mid-September, while Buck will hold his puts until harvest in the first half of October.)
Covered Cal is a seller of call options. This is an unconventional approach to hedging. Sellers of calls have a limited gain and a limited hedge, aka the premium received for selling calls. His is a flat price strategy that works best in a year with prices stuck in a trading range.
Options can add value in marketing. Think of any year with a sharp price increase like the drought year of 2012. Peter and Buck were served well with their options. Then think of many other years when prices did not have a pronounced trend; those were Cal’s years to shine.
I am not a big user of options, but they can have their moments. My advice? Be selective.
Hopefully, my answers to the previous four questions will help you in writing a preharvest marketing plan
for the 2024 crop year.
To get further into the weeds, many readers have asked the following questions of me:
Do you have a plan for pricing grain before the harvest of 2024? Yes, my 2024 preharvest marketing plans for corn and soybeans are shown in the stories below. I have been writing plans for over 20 years because I want to do better than Barney and his harvest price.
Looking closely at my preharvest marketing plans, you’ll see they have incorporated the wisdom gleaned from the marketing roundup.
Do you need a minimum price objective? Yes! Using data from the national farm financial database Finbin (finbin.umn.edu) and listening to the wisdom of Minnesota farmers, I assume 2024 production costs of $5.05 and $12.40 per bushel for corn and soybeans, respectively. These are my minimum price
objectives for 2024.
When do you start pricing grain? Jan. 1 is the start date for both plans, but I am willing to start earlier with prices 50 cents above my production costs in corn and 75 cents in soybeans.
Will you use options? I am purposefully vague in my plans about the tools I will use. “TBD” means “to be determined,” and that includes the consideration of all pricing tools, including options.
Where can I find your book? To learn more about these characters and other celebrity producers involved in postharvest marketing, you can find my book, “Grain Marketing Is Simple (It’s Just Not Easy)” at lulu.com.
I hope my characters have given you something to think about as you write your own plans for 2024. Good luck in the year ahead.
This is based on a southern Minnesota or northern Iowa farm producing 100,000 bushels of corn. It assumes a $5.05-per-bushel production cost and a harvest basis of 40 cents under the December contract. (Production costs and basis should be adapted for your region.)
My objectives are to buy crop insurance to protect my production risk and price 75% of my anticipated corn crop, per actual production history yield, by late June, at these levels:
15,000 bushels at $5.05 cash price ($5.45 December futures) using forward, futures or a hedge-to-arrive contract.
10,000 bushels at $5.45 cash ($5.85 futures or by March 25); pricing tool to be determined (TBD)
15,000 bushels at $5.85 cash ($6.25 futures or by April 23); pricing tool TBD
10,000 bushels at $6.25 cash ($6.65 futures or by May 23); pricing tool TBD
15,000 bushels at $6.65 cash ($7.05 futures or by June 5); pricing tool TBD
10,000 bushels at $7.05 cash ($7.45 futures or by June 21); pricing tool TBD
My plans start on Jan. 1. Earlier sales may be made at a 50-cent premium and would be limited to 30,000 bushels.
Ignore decision dates and make no sale if prices are lower than $5.05 local cash price or $5.45 December futures. Exit all options positions by mid-September.
This is based on a southern Minnesota or northern Iowa farm producing 27,000 bushels of soybeans. It assumes a $12.40-per-bushel production cost and a harvest basis of 50 cents under the November contract. (Production costs and basis should be adapted for your region.)
My objectives are to buy crop insurance to protect my production risk and price 75% of my anticipated soybean crop (per APH yield) by late June, at these levels:
5,000 bushels at $12.40 cash price ($12.90 November futures) using forward, futures or an HTA contract
5,000 bushels at $13.40 cash ($13.90 futures or by April 23); pricing tool TBD
5,000 bushels at $14.40 cash ($14.90 or by May 23); pricing tool TBD
5,000 bushels at $15.40 cash ($15.90 or by June 21); pricing tool TBD
My plans start on Jan. 1. Earlier sales may be made at a 75-cent premium and would be limited to 10,000 bushels. Ignore decision dates and make no sale if prices are lower than $12.40 local cash price or $12.90 November futures. Exit all options positions by mid-September.
Learn more about navigating volatile markets at the Farm Futures Business Summit in Coralville, IA, Jan. 9-11, 2024.
Read more about:Farm Futures Business Summit
Marketing specialist, University of Minnesota Center for Farm Financial Management
Ed Usset is a marketing specialist at the University of Minnesota Center for Farm Financial Management. he authored "Grain Marketing is Simple (It's Just Not Easy)"; helped develop "Winning the Game" grain marketing workshops; and leads Commodity Challenge, an online trading game. He also blogs about grain marketing at Ed's World.
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