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Corn+Soybean Digest

Shucking Low Prices

You certainly can't say Steve Mercer and his family drag their feet in marketing corn.

To the contrary, by making high percentage sales more than a year in advance of the 2005 harvest, the Nebraska producer's corn is booked at about $2.50 cash — likely well above local cash bids at the local elevator.

The Mercers are a three-generation farm and livestock operation. Steve and his brother Scott have followed in their father Dick's footsteps. Sons Chad and Karl are also heavily involved in the corn and soybean farm and 3,000-head feed-yard.

A marketing program that wastes no time in securing profits helps keep the operation successful.

“About ¾ of our 3,200 crop acres are in corn, with the other quarter in soybeans” says Mercer. “We decided a few years ago that we probably did a better job of growing the crops than marketing them on our own. So we started using a marketing service that showed us some historical trends. They can usually provide good pricing opportunities.”

The Mercers use a regional Cargill marketing program, which enables them to develop good marketing strategies without all of the emotions involved in selling commodities.

Basically, Mercer describes it as a “direct rule criteria” program in which a “target” price level (not to be mistaken for the federal farm program target) is used for triggering corn sales.

“The marketing advisers showed us charts that indicated December corn (futures) failed to reach $2.65/bu. only twice in the past 15 years,” says Mercer, adding that when that level or above was hit, it did not remain on the board very long.

“We began looking at marketing about 50% of the 2005 crop in late 2003. We put in a target price of $2.70 futures. When that level was reached in early 2004, about half our crop was automatically priced at $2.70. We actually got some corn locked in at $2.81 futures, based on a hedge-to-arrive-contract for delivery to Cargill.”

Basis, which is normally 20-25¢ under December futures, can be set at any time. The Mercers got their basis set this summer at about 20¢ under, giving them a cash price of $2.50-2.60.”

Knowing when to pull the trigger at the $2.70 or higher level was influenced by the marketing program's “relative strength” (RS) value. “When the market topped $2.70, the RS was about 70%, meaning the market was likely over-bought at that level and would probably come down, which it did. Our target automatically kicked in with the 70% RS.”

Not all marketing is left up to Cargill.

To prevent possible lost dollars due to an unexpected price run-up at harvest, the Mercers bought call options to take advantage of any higher prices.

As for the 50% of the corn not priced in the program, Mercer has $2.40 December '05 put options in place to set a secure floor. “There are too many instances in which the harvest price is at $1.70 or lower,” says Mercer. “That's too much slippage in prices. With our marketing service and additional protection, we don't worry as much about that slippage.”

The summer's volatile corn market provided several marketing opportunities for growers, says Mike Woolverton, Kansas State University grain marketing economist. “The market reacted a lot to the dry period in parts of Illinois and Iowa,” he says. “The hope is that growers got some of their corn marketed when there were opportunities.

“If we see markets at the $2.50 level into the early fall, I'd certainly be wanting to move some corn.”

Glenn Johnson, president of Financial Investor Services in Grand Island, NE, says '05 corn prices, even though December futures rallied briefly in late June and early July to above $2.50, will likely be at $1.80 cash or below at harvest.

However, like Mercer, Johnson suggests that growers who want to be open to higher prices after their '05 crop has been marketed should consider using call options. “Some of our customers had $2.60 December calls in place for an overall cost of about 11¢/bu.,” says Johnson. “Some were able to add another 10¢/bu. to their corn prices.

“But growers with call options in place should watch the market closely in the event there is a sharp run-up in prices. If that happens, they should be prepared to get out of the positions and possibly take home the profit before they would be subject to margin calls.”

What about 2006? The Mercers had their $2.70 target price and 70% RS value ready and waiting to be triggered this fall or later on. “We even have the same levels set for '07 if there are opportunities that far out,” says Steve.

“We don't try to second guess our marketing plan. If there is a weather scare or other situation that causes prices to go up, then our targets are triggered automatically.”

Woolverton says growers should look strongly at getting some '06 corn sold early if there are $2.50-2.60 prices on the board. “We saw an increase in corn acres in '05. If strong prices happen to continue, we could see more corn acres next year,” he says. “If growers see good prices, they should start marketing some of their '06 crop. It looks like it could be one of those opportunities that comes along every five or six years.”

Johnson says the price levels in the $2.60-2.70 range used by Mercer are a good guide for others. “For '06 corn, growers need to be looking for points to sell now,” he says. “If December '06 futures hit $2.60-2.70, growers need to be 65-70% sold.”

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