December 18, 2019
2019 was a difficult year. I think it best to forget last year. Let’s look to a fresh start in 2020.
My pre-harvest marketing plan for 2020 is shown. This is a simple plan that consists of two key elements - price targets and decision dates. It also involves a tactical question on pricing tools.
My price targets begin with a minimum price objective - $3.75 cash or $4.25 Dec’20 futures. These figures are consistent with my estimated break-even cost of production. The implied basis level is 50 cents under the Dec’20 at harvest. Basis levels at harvest were much higher in 2019, but I think it wise to assume a return to more normal levels for Minnesota in 2020. You should adapt minimum prices (i.e. production cost estimates) and basis for your area. On the high side, my price targets reach $5.75 Dec’20 corn futures. Does this look wildly ambitious? Not to worry. Decision dates have a way making maximum price targets less important.
Decision dates are dates when I price grain, regardless of whether or not I reach a price target, as long as the price is higher than my minimum. Decision dates are critical – they transform a marketing plan from a wish list of high prices to a real plan for action. I cluster decision dates in March, April, May and June because spring is often a good time to price grain. However, don’t forget your minimum price! I will ignore decision dates if prices are lower than $3.75 cash/$4.25 Dec’20 futures in corn.
Now about that tactical question concerning pricing tools. Should I use forward, futures or options contracts? This is a question about basis and “upside” potential. If your elevator is bidding a solid and competitive basis for new crop delivery, the forward contract is a good pricing alternative. If not, futures and HTA contracts buy time for the basis to improve. If you’re willing to pay the cost, options offer upside potential. The high cost of options is the main reason I prefer to use futures, HTA or forward contracts early in the plan, when price targets are closer to break-even levels.
The market has enjoyed a modest mid-December rally, and Dec’20 futures are above the $4 mark. A rally is good, but still 20-25 cents shy of my minimum price. If prices remain below my minimum (and costs), I intend to price 20-40% of the expected crop this spring. Why? Because sometimes we maximize profits, and sometimes we minimize losses. But for now and through the winter months, patience. Sometimes good marketing demands patience.
My pre-harvest marketing plan is not a plan to sell the high. It will not eliminate the anxiety that comes with pricing decisions. My approach is an attempt to find a good average price.
Let’s hope we find it in 2020.
2020 Pre-Harvest Marketing Plan for Corn
Buy crop insurance to protect my production risk and price 75% of my anticipated corn crop (per APH yield) by late June.
Price 10,000 bushels at $3.75 cash price ($4.25 Dec. futures) using forward contract/futures hedge/HTA contract
Price 10,000 bushels at $4.05c/4.55f, or by March 20, pricing tool tbd
Price 10,000 bushels at $4.35c/4.85f, or by April 19, pricing tool tbd
Price 15,000 bushels at $4.65c/5.15f, or by May 17, pricing tool tbd
Price 10,000 bushels at $4.95c/5.45f, or by June 5, pricing tool tbd
Price 10,000 bushels at $5.25c/5.75f, or by June 17, pricing tool tbd
Plan starts on January 1, 2020. Earlier sales may be made at a 40 cent premium and limited to 30,000 bushels.
Ignore decision dates and make no sale if prices are lower than $3.75 local cash price/$4.25 December futures.
Exit all options positions by mid-September 2020.
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