Consider that each year since 2013 both corn and soybean futures prices have peaked somewhere between early April and mid-July. Farmers could preharvest-market a portion of their new-crop corn and soybeans during the growing season at prices that proved to be much higher than those received at harvest. Those farmers could have delivered priced bushels at or shortly after harvest and avoided additional storage and interest charges and generated necessary cash flow.

With a late start to the planting season for much of the western Corn Belt in 2018, futures prices built in additional risk premium. That’s despite the threat of a trade war with China and increasing global export competition. New-crop futures prices spent most of spring above their crop insurance projected prices of $3.96 per bushel for corn and $10.16 for soybeans, respectively. Thus, the strategy to sell a portion of your insurance bushels above those established projected prices remained in play.

Why seasonal patterns occur
Most years, corn futures prices tend to rally in early spring and peak by late June or early July. This reflects the period of the greatest uncertainty of production for a crop produced primarily in the Northern Hemisphere. Soybean futures prices move higher in late fall and winter months, when Southern Hemisphere production is threatened. Then soybean prices typically rally again in late spring and early summer, reflecting uncertainty of production in the Northern Hemisphere. However, by mid-July, the highest seasonal prices have occurred, and futures prices tend to sell off with the confirmation of large Northern Hemisphere crops.

So why don’t farmers take advantage of these seasonal trends, reducing storage costs and generating needed cash flow? The likely cause is a combination of both procrastination and the fear of being wrong. Farmers are eternal optimists by nature, so the same optimism for producing a crop carries over in marketing the crop. Annually, many farmers think the damage to crops is widespread enough that futures prices should rally into late July and August. By then, the futures market has peaked as the risk premium is extracted.

The cost of unpriced bushels
Once the crop is harvested and stored unpriced, grain ownership starts reflecting both the cost of storage and accrued interest charges. On-farm storage costs would typically be lower than commercial storage, assuming the grain bins on-farm are paid for. Having the bushels stored on-farm can lead to more choices in determining the best cash prices and where to deliver those bushels. Building new grain storage and making principal payments can use up valuable working capital (current assets minus current liabilities).

New-crop futures price objectives reflect both the futures price and cash price you are willing to accept. The difference between these two prices is called basis and reflects local supply and the demand for that crop. With large old-crop supplies readily available throughout the Corn Belt, basis will tend to be wider or weaker than normal after spring and continue through harvest.

In 2018, weather concerns will likely have to cover a large geography of the U.S. or China to see significantly higher futures prices beyond the spring months. Consider the use of hedges or hedge-to-arrive (HTA) contracts for selling new-crop bushels, as the basis for fall delivery will likely stay wider than normal. A large number of bushels are moved in late August and September, just prior to harvest. 

The written marketing plan
Farmers should avoid marketing mistakes of the past by knowing their own cost of production for new-crop bushels and establishing a reasonable breakeven price. Consider having both time and price objectives in place going into the spring months. Price objectives should reflect the futures price when above the projected prices used for crop insurance purposes, basis (cash minus futures) and your own breakeven costs.

The cost of production for growing crops will vary greatly by farm and be highly dependent on the final crop yields. The use of revenue protection crop insurance mitigates a large portion of both the yield and price uncertainty for marketing new-crop bushels. Consider using your actual production history (APH) as your best yield estimate prior to pollination and grain fill.

Farmers who typically have a written marketing plan develop a purpose and accountability to market that grain ahead and align their cash flow needs. Storage and interest charges are not free, and many farms are challenged by their ability to find profitable margins. Holding multiple years of corn or soybean crops can lead to the erosion of valuable working capital that can then lead to the need for restructuring debt into an era of higher interest rates.

Use variety of marketing tools
Farmers should use a variety of marketing tools to spread their risk and attempt to time sales in the spring to capture futures when prices are high, or when basis narrows. These events tend not to occur at the same time. So, using only spot cash and forward-cash contracts can have serious limitations. Consider the use of HTA contracts, perhaps using January soybeans or March corn futures to reward on-farm storage. The combination of low futures prices and wide basis, especially at harvest, has created the need for more aggressive preharvest marketing strategies than was used in the past.

Consider the use of a variety of marketing tools. If delivering bushels, include hedge-to-arrive or forward-cash contracts, depending on the basis expected. Should a farmer prefer to manage the futures price risk and not commit bushels to delivery, consider the use of futures hedges or the purchase of put options.

Johnson is an Iowa State University Extension farm management specialist. Contact him at [email protected] or visit his website.