August 1, 2011
Just ask Charlie Crow, Franklin, IL, whose preharvest soybean marketing was dragging behind due to late-planted beans and too much rain. Then there’s Michael Bryant, Copeland, KS, who worried about forward contracting too much corn for fear of lower yields from the worst drought in decades.
Both growers favor preharvest sales, by means of staggered forward contracts with local grain handlers high on their list. They were among most others who cringed when corn, bean and wheat markets took a troublesome tumble following the June 30 USDA acreage report of 5% higher corn acres and 3% more bean acres.
Limit-down movements pulled December corn futures prices to about $6/bu. after seeing $7.20+ three weeks earlier. November soybean futures dropped below $13/bu. after seeing $14+ a few weeks earlier.
Brazil's July projection of a 9% higher soybean crop added further price volatility. Corn and bean prices bounded back some in mid-July, proving that price volatility still rules.
Chris Hurt, Purdue University Extension economist, says growers were a little numb after the mid-summer swoon. “There nothing like a good sharp drop in prices to show us reality,” Hurt says. “It showed that prices are vulnerable and that growers should consider selling some corn or beans early, especially when prices are still strong.”
Art Barnaby, Kansas State University Extension economist, says that overall it appears most growers remain bullish on corn and soybean prices, even with the mid-summer price plunge. “Otherwise they would have most of their crop sold,” Barnaby says. “They would have also sold out their old crop.”
Crow’s soybean sales weren’t as frequent as he would have liked. He grows corn and beans and puts together feeder cattle for finishing in High-Plains feedyards. He usually has close to 50% of his soybeans marketed by the Fourth of July. Not this year.
“I was only 10-15% sold by then, when I would normally be 40-50% sold,” Crow says. “But our beans were a little late and we had too much rain, including a foot in one 24-hour period and 18 in. in a single week. That really put our beans and corn behind.”
Crow began making early soybean sales early this year. Several forward contracts put his average cash price at about $13/bu. In addition, he has call options in place to cover beans that are contracted in the event of a price increase. “I want to take advantage of any market spikes,” he says.
He is also likely to buy put options to set a floor price on many unmarketed beans. “We use out-of-the-money options to lower the cost of price protection,” he says, adding that crop-revenue insurance is also an “option” to protect prices.
Crow uses the Group Risk Income Plan (GRIP) level of USDA’s Risk Management Agency. That’s the county-level revenue insurance program. His cost is about $60/acre for 85% coverage, based on University of Illinois farmdoc calculator numbers for the Morgan County region (see www.farmdoc.illinois.edu/manage/newsletters/fefo11_04/fefo11_04.html).
“I like to max out the GRIP coverage, and the cost per acre can sometimes vary,” Crow says. “But I think the revenue-assurance programs can be good marketing tools for growers, especially those who don’t like futures or options for beans or corn.”
Hurt estimates that close to 30% of soybeans had been marketed by early July. “Vulnerability on soybeans (growth) is a little greater,” he says. “August and early September is the timetable for growing beans, and many growers are not as far along they would like.”
He adds that “more growers are interested in hitting singles than going for the home run. That goes for corn and beans.” And straightforward contracts, along with hedge-to-arrive (HTA) contracts, are seeing a lot of action.
“Farmers seem more fearful of facing margin calls by using futures strategies with their broker,” he says. “With HTAs, the grain elevator is responsible for any margin calls. That’s a big deal.
“With HTAs, growers can set the futures price through the elevator, but don’t have to set the basis (difference between the cash price and futures price) until they’re ready. Many elevators also allow growers to roll an HTA forward from November into January, March, May or beyond to possibly see an improved basis.
“It gives growers flexibility in determining whether they want to store beans or not (on-farm or at the elevator for a storage fee).”
Extreme dry weather is the main reason Bryant hasn’t made any preharvest soybean sales. “We’re mostly corn, wheat and milo and don’t grow that many beans unless they’re double-cropped after wheat,” he says. “But with the drought we continue to see, it’s been too dry to project any bean yield range to base marketing on.
“We’re also not comfortable gauging what our corn yields will be with the hot, dry weather,” he says. “However, on corn we’re still 80% covered on the downside and 60% covered to the upside overall. We had those positions in place before the June 30 acreage report that caused a big decline in prices.”
Bryant, his brother Blake, father David and 91-year-old grandfather Don farm primarily under center-pivot irrigation.
With two-acre-feet Kansas watering restrictions pushed to the limit this year, drought can cause big yield fluctuations, from 180 bu. in one field to 220 bu. or more in another.
Bryan gauges the amount of corn premarketed on how the weather cooperates as much as prices, even though a lot of early sales are made a year or more in advance.
“Our goal has been to have enough marketing in place to not be devastated if the market goes up or down the limit,” he says. “You get a surprise in nearly every report.”
A combination of forward contracts with a local elevator and options to back them up are the bulk of Bryant’s corn-marketing strategies prior to harvest. “Our corn is about 50% forward contracted and 30% marketed with put and call spreads,” he says.
“We started forward contracting this year’s corn in June 2010. We staggered sales between $4/bu. back then to over $6.90 this summer, with the biggest range of contracts between $4.50 and $6.50. We have December corn call options on top of many of those sales. We bought the calls to have upside protection if the market goes up.”
If prices increase, the value of the calls should increase. Bryant could then add to the contracted price. “Some of those calls are for between $7.30 and $8,” he says. “They were bought out of the money and reflect the volatility we anticipate in the market.”
For the 30% of the expected corn that’s uncontracted, Bryant has put/call spreads. “They’re in the range of $6 puts and $8 calls,” he says. “We were able to reduce the cost of the near at-the-money puts by selling out-of-the-money calls. The whole cost is about 30¢ bu.”
If the corn futures price surpasses $8, he would face margin calls. “But if it reaches $8, we won’t mind paying them,” he says. “It makes for good insurance.”
Hurt says HTAs are also part of many growers’ corn marketing. Like with beans, about 30% of the corn was priced before July 4. “Some got the corn planted at a reasonable time, and there were some extraordinary prices,” he says.
As with soybeans, Hurt says growers are more diversified in getting corn sold than there were 10-20 years ago. “Along with HTAs, straight forward contracts and options make up the bulk of marketing strategies,” he says. “Certain options strategies (similar to Bryant’s) can help growers better manage their price. If they have corn contracted at $5.50 to $6, buying an out-of-the-money December $6.60 or $6.80 call gives them a chance to gain if the market goes up.
“Good standard marketing strategies make a lot of sense,” he adds, while advising growers to look into getting a 2012 marketing plan in place early. “My objective is for growers to have 25-35% of their corn or beans forward priced by mid-May, then follow that up with some sort of drought protection. If growers market 25-35%, they shouldn’t be worried about making that crop.
“Then, when they see how pollination goes and know other factors impacting prices, they can proceed with additional marketing.”
The Bryants have several hundred thousand bushels of on-farm storage to hold corn if prices go down on bushels that aren’t sold or have delayed delivery dates. That’s another risk-management angle for them. So is locking in inputs.
“We know that fertilizer, seed and natural gas for irrigation are our biggest input costs,” Bryant says. “We bought much of our anhydrous ammonia early at levels up to 15% below what they were when we applied it. We’ve also tried to contract some natural gas to have a better idea what our costs will be for the growing season.
“If you have your inputs managed, especially in a year like this where the drought keeps our production as a moving target, you can work through marketing scenarios. That makes it easier to pull the trigger.”
Not 2008 again
It was a situation even the best prognosticators couldn’t predict – the massive run-up in corn, soybean and other commodity prices in 2008. Corn burst through $7/bu. Beans exploded past $16.
Grain handlers were caught sharply off guard and faced enormous margin calls on HTA and other distant grain contracts. Soon afterward, many wouldn’t contract for grain more than 60, or even 30 days out. Farmers couldn’t take advantage of high prices and backed away from using futures or options themselves for fear of massive margin calls.
But even with recent price increases and volatility, 2011 is seeing elevators on firmer ground with their lenders and willing to provide more marketing flexibility, says Chris Hurt, Purdue University Extension economist.
“What elevators went through in 2008 is not as extreme this year. Elevator managers know to be cautious. So do lenders, who set guidelines on them.”
Art Barnaby, Kansas State University Extension economist says some grain handles are still limiting the amount of multi-year marketing allowed, “but it’s not widespread.”
Barnaby says the biggest mistake growers make in marketing is failing to make sales. “Not making a decision is a problem with some,” he says. “And doing nothing can hurt them.”
Hurt says growers need to get off the fence in marketing. “If you’re going to win in marketing, you have to put your chips down before you know the outcome. You can’t wait to know you have 180-bu. corn,” he says.
“Growers need to set price objectives. There are too many who market when the price goes down than when it goes up. Many people get locked into facing a big decision. But if you see a chance for a profit, make some sales. Turn a big decision into 10 little decisions spread over the year.”
Hitting the top 10% of a market for year is a good goal, but an unrealistic one, Hurt says. “Try to have overall sales that are even 2-5% over the average,” he concludes. “That should produce some profits in most years.”
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