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Corn+Soybean Digest

Forward Contracts Win In 2006

I analyze a lot of historic data, review different risk-reward ratios and evaluate chart patterns when making marketing recommendations. I also review all of this when I help a farmer with his marketing plan.

Here are three guiding principals I use each year:

  1. Forward pricing corn and soybeans for fall delivery in the March-to-July time period will work to a producer's benefit 80% of the time.

  2. Forward pricing with hedges or hedge-to-arrive (HTA) contracts will make more money than forward contracts 90% of the time. This also allows you to shop your basis and roll the hedges ahead if you have storage.

  3. Sell a small crop early and store a large crop for later delivery.

If you use these principals and stay disciplined, odds are good (never 100%) that you will make better marketing decisions on your farm.

In the last two years, farmers who used the March-to-July rallies to forward price made a lot more money than farmers who waited and were forced to sell right off the combine. This fall, the new-crop corn contracts showed gains of 30-50¢/bu. with a lot of new-crop soybean contracts $1-2 in the money.

Hedges worked great in the fall of 2004. Producers who were able to carry the grain into November had good gains on their hedges, and they also realized a 10-20¢ basis improvement.

New-crop hedges were the right financial decision in 2005, but the extremely wide basis made hedging the wrong merchandising decision. High fuel prices and Hurricane Katrina were the main factors causing this basis distortion. This year farmers who entered into new-crop forward cash contracts made the right choice.

Futures Risk Basis Risk
Forward Contracts x x
Hedges x
Basis Contracts x
Delayed Price Contracts

Consider Your Contract Options

Grain companies are coming up with all kinds of new contracts for producers to use. The chart below is a partial list of the most common marketing alternatives farmers have and the risk you control with each alternative.

Marketing Alternatives

It's always best to look at all your alternatives and understand the advantages and disadvantages of each contract. With forward contracts you're locking in the futures and basis — you know the exact cash price that you have locked in.

With a hedge or hedge-to-arrive (HTA) contract you have locked in the futures price, but still have basis risk. The opposite of a hedge is the basis contract where you lock in the basis, but still have the risk of futures market. The delayed price contracts usually don't benefit farmers and still have all of the futures and basis risk.

Last year many Midwest soybean farmers had the best of both worlds with a high futures price and a premium basis bid at processing plants.

This year the pendulum has swung the other way as farmers look at a low futures price and a wide basis. Odds are good that one or the other — or both — will change by later this year.

Looking ahead, I still believe getting new-crop prices locked in with hedges will be the right merchandising move nine years out of 10.

For producers who have storage, rolling the December 2005 corn hedges out to March 2006 corn and the November 2005 soybean hedges out to January 2006 futures will allow you to pick up the carry and sell on a better basis in 2006.

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