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Planning for profit

Combining MPCI, hedging, PLC and additional government support yields more than $1,000 per acre.

David Kruse thinks he could market his corn for up to $5 per bushel this season using various risk management tools. 

This is not the ag depression of the 1980s, mostly because of the safety nets and marketing tools set up for corn growers in response to the decade's financial devastation.  Here are the numbers for Kruse's projected corn revenue for 2020.

Approved yield

He has a 233 bpa approved yield on the family farm my grandpa homesteaded. 

233 bpa x 85% MCPI coverage = 198 bushels X the 3.88 guaranteed price = $768 per acre revenue guarantee. 

We had one of the best springs for planting in a long time, so his yield goal is closer to 240 bpa with little to no drying cost. 

If December futures were to fall to $2.50 this fall at harvest, he would be looking at an indemnity payment. 

Taking 240 bpa x 2.50 = $600/acre.  The $768/acre guarantee minus $600/acre production revenue for insurance purposes would generate a $168/acre MCPI indemnity payment.

Price Loss Coverage

Now let’s take a look at the Price Loss Coverage program. 

Using his farm base yield of 180 bpa x 75% corn base x trigger price x potential $2.50 at harvest would amount to roughly $1.20 per bushel payment.  The PLC yield of 180 bpa x $1.20 x 85% = $183.60 x 75% = $137/acre PLC payment.

Hedging

Perhaps most importantly, he has his 2020 corn 100% hedged at $3.70 basis December which at $2.50 bushel this fall would be a $1.20 bushel hedge profit x 240 bpa = $288/acre. 

Using $2.50 December price at harvest, he would still be facing a 50-cent harvest basis (historical levels are closer to 40 cents).  This would put him at 240 bpa x $2 per bushel or $480 cash sales.  So, if I tack on $168/acre MCPI revenue payment, $137/acre PLC payment and $288 hedge revenue, he is looking at total revenues of $1,073/acre.   

Recapping: $480 + $168 + $137 + $288 = $1,073/acre

More government aid

But wait, there is more.  He has on-farm storage for this corn, so will bin it and pick up both basis and improvement carry into 2021. I also don’t think it is unreasonable to expect additional support from the federal government.  I would not plan on this though.  But if it happens, great.  The presidential election is six months away and President Trump will be looking to shore up as much support as possible.  Taking all of this into consideration, I think that his final net corn revenue could be closer to $1,200.  This is marketing.  This is how you make money in a bear market.  If you take final net corn revenue ($1,200/acre) divided by 240 bpa, you get $5 a bushel for new crop.

Hail coverage

Yes, I am aware the crop is not in the bin yet and the yield and the harvest price are unknown.  Plans never work out perfectly, especially in farming.  But the point to all of this is that at least we have one, and it doesn’t depend upon a Hail-Mary turn around, based on factors completely beyond my control such as weather or China Phase-One purchases.  What if he gets hail like last year?  He spent $21/acre for $900/acre no-deductible hail insurance.  Do the math.  With the MCPI, PLC, CCC payments and hedges . . . getting hailed out could generate $1,500/acre revenue.  Let it hail!

Hedging 2022 crop

What happens next February if the price is 2.88 instead of 3.88 like this year?  He also hedged his 2021 crop in July of 2021 at 3.91.  The way we look at it is if the ethanol industry consumption is down hundreds of millions of bushels, general livestock liquidation reduces feed usage, and the strong dollar gives our export competitors the edge while making our corn more expensive to our customers  . . . why exactly would the price of corn be at a pre-COVID-19 price level? 

Prepared to be profitable

Most appear to be desperate for a bottom in the corn market, holding out hope for an eventual rally in prices.  I certainly hope that happens.  But if not, we are prepared.  There are things that keep me us up at night, but the farm's bottom line is not one of them.  We will keep growing corn and we can discern a way to be profitable for two years. 

Matthew Kruse, Commstock Investments president, can be reached at 712-227-1110 or emailed at matthewdk@commstock.com.
Futures trading involves risk. The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance is not indicative of future results. Trading advice is based on information taken from trades and statistical services and other sources that CommStock Investments believes to be reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades.
The opinions of the author are not necessarily those of Farm Futures or Farm Progress.
TAGS: Corn
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