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Reconsider How Far You Go On Forward Contracting Next Time

Reconsider How Far You Go On Forward Contracting Next Time
Some contracted more corn than many recommended this growing season.

If you rolled the dice in May and forward contracted, looking like there would be a big crop and a low harvest price, you weren't alone. No one, not even the smartest climatologist on earth, can tell when a trend, in this case a weak dry trend, will go extreme. You had no way to know the odds simply went against you.

Late winter and spring of 2013 might be a good time to forward contract part of the 2013 crop, says Chris Hurt, Purdue University Extension ag economist. The trick is not contracting too much – if nature rolls snake eyes again, you're not caught deep in the hole so far that you can't deliver on your contract.

FORWARD CONTRACT: Keep it in your marketing tool box even if it didn't work in 2012.

Selling up to a total of one-fourth to one-third of production on forward contract probably makes sense, Hurt says, especially if you have revenue crop insurance. However, some people sold a higher percentage of their crop than that in the spring of 2012. They are the ones faced with buying back contracts now at around $2.50 per bushel more than they contracted for in the first place.

The secret is to use forward contracting as a tool, and stay within the limits that make sense for your operation, he says. The goal isn't to sell your whole crop, but instead to begin marketing part of it. If the price goes down later on actual bushels that materialize, then the forward contract price on the bushels you sold tend to offset the lower price you receive later.

Hurt suggests looking at forward contracting as one of several marketing tools at your disposal. Even if it cost you money this year, he says you should keep it in your toolbox. Just because forward contracting in April or May for 2012 December corn didn't turn out to be the right play this year doesn't mean that it won't be the perfect play in February through May of 2013 for December 2013 delivery.

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