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Corn+Soybean Digest

Farmer-Feeder Covers His Bases

Texan locks in high and low corn prices When Texas Ranger Pudge Rodriguez comes to bat, American League foes know the spray-hitting slugger could send the ball deep and anywhere. Farmer-cattle feeder Steve Mercer takes a similar approach in covering corn prices.

He tries to cover all his bases to protect against price drops for corn he's selling and price increases for corn he's feeding. His marketing lineup usually features futures, options and cash contracts to put a good defense on the field.

His Kearney, NE, family farm and finishing feedyard operation, Double M Farms, Inc., has about 3,000 acres of corn production, and a 3,000-head-capacity feeding program. In normal years, Mercer tries to market half his crop early and store and feed the other half after harvest.

To secure a solid price early in 2000, he went with hedge-to-arrive (HTA) contracts in April and May. They were based on $2.63/bu December 2000 futures. Because there were early predictions of drought, he took steps to cover the upside.

"I put on a bull-call spread," says Mercer. "I bought a $2.60 December 2000 call option and sold a $3.10 call option. The total cost was about 10. If the price had increased, I had an upside window of $2.70-3.10."

With all those trades, he was guaranteed at least a $2.63 futures price with strong upside potential. And with the HTA, he was able to set the basis for his local cash price anytime prior to delivery.

In early July, he cash-contracted additional corn at about $1.80, along with another bull-call spread to take advantage of any price increases. He bought $2.10 December calls and sold $2.50 December calls for a total cost of 6/bu. "That extended my protection against a drop-off in profits (from the cash-contracted corn) to about 30," he says.

With projections for a larger crop after summer rains, he felt the harvesttime price could easily approach $1.50. With the loan rate at about $1.87, that gave him an LDP of about 40.

As for corn that would remain on-farm and at the feedyard, Mercer wanted to make sure that reasonable cattle prices would not be offset by jumps in corn prices. For protection, he used put and call options on about one-third of that corn.

"I bought $2.50 December puts and sold $3.10 December calls to reduce that cost for protection to 6/bu," he says.

With that move, and with harvest prices below $2.50, he collected a premium by exercising the option and still had access to feed at a lower price. If the price had escalated, he could have collected a premium to offset higher feed costs.

For additional corn to be stored and fed, he watched market moves toward year's end.

"At harvest, when yield reports started coming in from the Corn Belt that the crop was not as good as originally thought, we covered our feed costs by buying enough July corn futures to cover our needs through the first six months of 2001," Mercer reports.

He notes that with the Freedom to Farm program, more individual grower marketing is needed. He would also like to see growers have more control over the grain market pipeline, but without hefty set-asides.

"Maybe an on-farm, three-year reserve program in which corn would come out at certain price levels," he suggests. "We could see better control over inventory. Right now we're at the mercy of elevators at harvest."

But until prices are more stable and profitable, he constantly keeps his eye on opportunities to lock in a higher price. He's already thinking about next season. "I'm looking for a chance to market 2001 and 2002 corn at $2.75-2.80 when a rally occurs," he says.

And he'll have his bases covered, even if prices take off.

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