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Corn+Soybean Digest

Now Or Then?

Nathan Ault hits a home run every now and then in his corn marketing. But he knows it's a rare feat. He'll settle for some run-scoring singles in the late innings to reach what he considers the win column for his family's Missouri farm that borders the Mississippi River.

“When we have an opportunity to grab a profit by locking in a price, we do it,” he says. “But we also take advantage of late pricing opportunities for both sold and unprotected corn.”

Ault, Charleston, MO, is a fourth-generation grower on land that has been in the family for nearly 70 years. Most corn, soybeans and wheat are sold to Consolidated Grain & Barge Co., which has more than 60 elevators across the Midwest.

The Aults have established substantial storage over the years to help capture the best basis that often flip-flops on the river.

Making a profit has taken different paths. For 2007 corn, marketing stretched from 2006 into 2008, says Ault, who works with a Little Rock, AR, marketing service to manage price risk.

“We started making corn sales at about $3/bu. last year,” says his consultant, Trent Roberts, Scott& Associates. “We eventually had 60-70% of Nathan's corn priced by the summer.”

Those sales ranged up to the high-$3 range. From there, Ault used put options to set a profitable floor price. But the puts strategy also left him open to upside price potential, and with substantial storage, not forced to sell at a horrible 50¢ under basis.

“We bought December '07 corn put options that averaged about $3.80 (at a cost of about 20¢/bu. per 5,000-bu. contract),” says Ault. “Most of that corn was stored on-farm and in our other storage facilities.”

The $3.60 floor price, including the cost of the option, was expected to improve with seasonal market moves after harvest. Basis had improved 20-30¢ by mid-October, but Ault was looking for a price rally into 2008.

The December puts were expected to be rolled into March 2008 puts for the unsold corn. The previously sold corn was covered by March 2008 call options.

“We established $4.10 March call options at a cost of about 15¢,” says Roberts. “The calls enable the Aults to get back into the market if prices trade higher for corn already sold.”

Melvin Brees, University of Missouri Extension economist, agrees with Ault's marketing strategies for the 2007 crop.

“Corn marketing plans should include strategies to capture basis gains and deciding whether to speculate on market trends or protect market carry,” says Brees. “Besides capturing higher prices, these plans also should include downside price targets to help avoid the risk of a market decline.

“Carry in the corn futures market (price premiums for distant month futures delivery or storage return offered by futures prices) signaled potential storage returns,” he says. “May 2008 corn futures prices have offered a price premium of more than 25¢/bu. over December 2007 futures prices. The July 2008 corn futures contract offered nearly 35¢/bu. of carry.

“In most cases, the deferred month premiums represent full carry by more than covering on-farm storage costs. The market carry can be protected by using futures hedges or some form of deferred delivery cash contract,”he says.

“Many analysts expect the market to bid for acres with higher prices to ensure growing demand needs are met,” Brees says. “Such a scenario was already occurring in mid-October when December 2008 corn futures prices surpassed $4 and were almost 50¢/bu. higher than nearby December 2007 futures prices,” he says.

Darrell Mark, University of Nebraska Extension marketing specialist, agrees that corn is going to have to compete again for 2008 acres. “With November 2008 beans at $9.45 and July 2008 Kansas City wheat at $6.70 (in mid-October), there are producers considering more soybeans and wheat vs. corn,” he says.

“The spread right now between November 2008 beans and December 2008 corn is nearly $5.50/bu. That's incentive to plant soybeans and avoid corn's high production costs,” he adds, noting that nitrogen prices are between $500-600 in eastern Nebraska.

Mark says a significant drop in expected corn acreage would spur a rally in corn and narrow that spread because corn use continues to grow. “It appears that ethanol demand might be slowing. However, there will continue to be more plants online in the next year,” he says. “Further, livestock numbers are increasing (particularly hogs), supporting increased demand there as well.”

As for a marketing strategy,Mark says that for locations where you can logically expect basis to rally to normal levels again next summer, “selling the carry,” being short futures or selling through an HTA contract, are alternatives to consider.

“While that removes price level risk and captures around a 35¢/bu. carry between December and July, it leaves you open for a strengthening basis,” he says. “If basis were to rally 20¢, it could be possible to net about 50¢/bu. from storage with primarily only basis risk.

“Option strategies might also be something to consider. I think it is important to at least protect the downside risk given all the variability that we're likely to see. While at-the-money options for deferred futures contracts are relatively expensive, some out-of-the-money puts can be purchased to protect against the train wreck kinds of moves that many of us are most concerned about,” Mark says. “Further, fence strategies that involve buying a put and selling a call can be done with relatively little net premium to pay out.”

Steve Amosson, Texas A&M University Extension economist, says the decision to hold corn in storage may depend on whether it is kept on-farm or at a commercial elevator.

“With a 9% interest rate, growers would be paying about 3¢/bu. in interest plus about 3¢/bu. for commercial storage, compared to about 1¢/bu. for on-farm storage,” he says. “That must be considered in wanting to hold grain.”

He says that while basis generally improves, historically the July futures price decreases 60% of the time from October through May. However, current factors still make storing corn a reasonable strategy, he says.

“This year I like the idea of holding it just because we have a high wheat price and a high soybean price in addition to corn,” says Amosson. “All will be competing for acres. There will be a lot of speculation as to who will get the crop acreage.”

There are also risks (in storing corn),” Brees says. “Lower wheat and/or soybean prices, narrower ethanol margins, production responses by producers worldwide to higher prices, slowing of exports and interest rates are just a few of the many fundamental factors that could change an otherwise optimistic price outlook.

“Negative price action could trigger technically driven selling action by fund traders and significantly lower futures prices,” says Brees.

Ault advocates systematic marketing that can expand well over a year in today's world. “It's hard to know when the highest price will come,” he says. “You show me a guy who sells at the top of the market all the time and I'll show you a guy with a fortune teller.”

Roberts says the prices offered for corn, soybeans and wheat “are amazing” and should continue to provide good opportunities for producers. “The next three crop seasons should enable growers to price crops and make a lot of money,” he says.

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