November 3, 2011
From establishing a breakeven, to setting pricing goals; then writing and managing a marketing plan to meet them, growers should map out a path that includes discipline with room to roll.
Doug Johansen, associate with Russell Consulting Group (RCG) in Worthing, SD, and Ed Usset, University of Minnesota Extension marketing economist, say a marketing plan can help guide growers through the maze of volatility in grain markets.
Usset, also a Corn & Soybean Digest contributing editor and host of “Back to School” on the CSD website, writes his own marketing plans annually. He uses a fictitious farm with 600 acres of corn yielding 150 bu./acre and 530 acres of soybeans yielding 45 bu./acre.
“I start with my preharvest plan, and the first consideration is production costs for the year in question,” Usset says. “It’s a starting point for price objectives in the year ahead.” He also writes a post-harvest plan.
RCG is headed by Moe Russell, Panora, IA, also a CSD risk-management columnist. RCG helps growers develop marketing plans based on gross-dollar requirements, cash flow and return-on-asset and equity objectives, Johansen says. “Everyone is different in his ability to manage and bear risk. We help clients work with the tools they’re comfortable using,” he says. “Growers don’t always follow the recommendations to the ‘T,’ but they use the plans to spread and manage their risk. Some prefer cash sales and hedge-to-arrives (HTAs); some prefer futures and options while others use a mix.”
The 2011 Usset and RCG plans were set in mid-2010, when corn futures were in the $4.40/bu. range and beans were about $10/bu. No one expected $7 corn or $14 beans, and there was profit potential at those futures prices.
Here’s a look at the recommended 2011 RCG corn sales to date, based on December 2011 corn futures:
• Aug. 2010 - 10% sold at $4.40
• Sept. 2010 - 10% sold at $4.55
• Nov. 2010 - 10% sold at $5.48
• Jan. 2011 – 10% sold at $5.44
• April 2011– 10% sold at $6.79
• June 2011– 10% sold at $7.15
• June 2011– 5% sold at $6.23
• July 2011– 5% sold at $6.79
•10% covered with put options
That amounted to 70% of production and another 10% covered with puts. “We’re comfortable with our sales to this point and will wait to market the remainder once we get through the fall lows and know how much crop we have to work with,” Johansen says.
“Should good carries develop, we’ll look at rolling out the December futures or HTAs into 2012 and monitor basis to make final cash sales,” Johansen says. “For those who have made, or need to make cash sales, we’ll look at re-owning a portion of those bushels with options or futures on breaks.”
Usset’s 2011 corn plan was also set early. “First, my marketing plans become ‘active’ on Jan. 1 of the year in question,” he says. “I’m willing to price grain earlier, but only at a 25-50¢ premium above price objectives.
“I won’t make early sales at a premium until I have a good sense for my production costs,” Usset adds. “I would argue that producers had a good sense for 2012 production costs last spring, when they began receiving fertilizer quotes for the fall.”
Here’s his 2011 corn plan through late September. Cash sales are based off a 40¢-under basis. “I ignored decision dates and made no sale if prices were lower than $4 local cash price, or $4.40 December futures,” Usset says. (Initial proposed trades in italics and actual trades are in bold face.)
• Price 10,000 bu. at $3.55 cash price ($3.95 December futures) using forward contract/futures hedge/futures fixed contract. Actual trade on July 16, 2010, $4.26 December 2011 futures.
• Price 10,000 bu. at $3.80 cash ($4.20 futures), by March 18, pricing tool to be determined (tbd). Aug. 30, 2010, $4.46 December 2011 futures.
• Price 10,000 bu. at $4.05 cash ($4.45 futures), by April 6, pricing tool tbd. Sept. 15, 2010, $4.71 December 2011 futures.
• Price 5,000 bu. at $4.75 cash ($5.15 futures), by April 18, pricing tool tbd. Jan. 3, 2011, $5.52 December 2011 futures.
• Price 10,000 bu. at $5 cash ($5.40 futures), by May 4, pricing tool tbd. Jan. 3, 2011, $5.52 December 2011 futures.
• Price 10,000 bu. at by April 18, pricing tool tbd. No sales yet.
• Price the last 10,000 bu. by May 17, pricing tool tbd. No sales yet.
Usset says he expects to have the remaining corn priced, “but I may choose to roll my hedges into the March, May or July contracts to capture carry in the market.
“Carrying charges in the corn futures market are not very large this year, but I am a basis bull. I believe that 50¢ under the December 2011 contract at harvest could be 20¢ over the July 2012 contract by early summer.”
RCG’s recommendations for soybean marketing based on November 2011 futures prices to date are as follows:
• Sept. 2010, – 10% sold at $10.89/bu.
• Nov. 2010, – 10% sold at $12.39.
• Nov. 2010, – 10% sold at $11.77.
• Jan. 2011 – 10% sold at $12.78.
• April 2011 – 10% sold at $13.69.
• July 2011 – 10% sold at $13.59.
• June 2011 – 10% sold at $13.94.
•10% covered with put options.
That’s 70% of expected soybean production sold and 10% covered with put options. With the $2.80 drop in bean prices from late August to late-September, the remaining beans will likely be marketed in 2012, barring an unexpected rally.
“Similar to corn, we’re comfortable with our sales at this point,” Johansen says. “We’ll look to roll the futures or HTAs over to 2012 if good carries develop, and we’ll monitor basis to make final cash sales. Futures or options may be used to cover previous sales on breaks.”
Usset’s soybean sales are based off a 70-80¢-under basis. He’s also looking at rolling soybean futures trades into 2012 due to the bullish potential for them. Here are his initial plans in italic and actual trades in bold for 2011 crop sales (he ignored decision dates and made no sale if prices were below $9.20 cash or $10 November futures):
• Price 2,500 bu. at $8.40 cash ($9.10 futures) using some form of fixed-price contract. Aug. 4, 2010, $10.13 Nov. 2011 futures.
• Price 2,500 bu. at $8.80 cash ($9.50 futures), by March 18, pricing tool tbd. Aug. 4, 2010, $10.13 futures.
• Price 2,500 bu. at $9.20 cash ($9.90 futures), by April 6, pricing tool tbd. Sept. 17, 2010, $10.56 futures.
• Price 2,500 bu. at $9.60 cash ($10.30 futures), by April 18, pricing tool tbd.Sept. 17, 2010, $10.56 futures.
• Price 2,500 bu. at $10.80 cash ($11.60 futures). by May 4, pricing tool tbd.Jan. 3, 2011, $12.94 futures.
• Price 2,500 bu. at $11.20 cash ($12 futures), or by May 17, pricing tool tbd.Jan. 3, 2011 $12.94 futures.
• Price my last 2,500 bu. at $11.60 cash ($12.40 futures) April 18, pricing tool tbd.
or by June 15. No sales yet.
USE RMA backup to manage price
Ed Usset’s marketing plans are supported by USDA Risk Management Agency Revenue Protection (RP) insurance. “In my sample production (see main story), I buy crop insurance to protect my production risk and have 75% of my anticipated corn crop priced by early June,” says the University of Minnesota Extension economist.
He’ll be looking at the 2012 RP insurance soon, but set his 2012 corn plan last spring. He had $4.25 cash as the minimum sales price for corn. His soybean plan hasn’t been written. On July 8 he made three separate 10,000-bu. sales using $6.14 December 2012 futures.
Marketing consultant Doug Johansen says early 2012 Russell Consulting Group marketing recommendations for corn featured three 5% sales,one in April for $5.75 December 2012 futures, and two in June at $6.25 and $6.29 December 2012 futures, and one 10% sale; in September at $6.03 December 2012 futures. One 5% sale was made in April using $13.05 November 2012 futures.
“Factors affecting commodities change constantly and often without warning,” he says, reaffirming why a marketing plan is needed. “Marketing plans help you avoid making panic sales on plunges or stalling on rallies. When markets rally, it’s natural to feel badly for selling early. When markets set back, you feel pretty good about early sales.
“It’s a vicious cycle that can tear you up if you let it. You put orders out there that meet reasonable objectives and fill them when you can,” Johansen says.
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