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Corn+Soybean Digest

Take The Profit

Gary Bunnell says, “You can't go broke making a profit.” He markets his corn, soybeans, wheat and cattle with that philosophy. He doesn't hit many home runs, bit he doesn't strike out much either.

Corn sold at more than $2.60/bu. is a solid hit as far as the Trenton, MO, grower is concerned. And his approach to staggered marketing using futures options and forward contracts produced that range of prices on much of his corn early on.

Melvin Brees, University of Missouri grain marketing economist, says growers like Bunnell usually take advantage of early profit opportunities when they are available. Brees says that philosophy should be used throughout the marketing year.

Bunnell tries to get up to 30% of his corn marketed prior to planting. For early 2004 crop marketing, he used a put-call options spread to establish a $2.60 floor price on part of his crop. More corn was also cash forward contracted in the $2.60 range. The contract was set using about a 30¢-under basis on December '04 corn futures priced at about $2.90.

His options trading strategy involved buying $2.60 December '04 puts for a premium of 13¢/bu., then selling $3.30 December '04 calls for 13½¢.

“That gave me a guaranteed floor price of $2.60 for the cost of less than 1¢/bu.,” says Bunnell. “I also can take advantage of price rallies up to $3.30.”

Brees says growers should consider several signals in the market before making their final corn sales as harvest begins and as the year ends. “As harvest approaches, look at what the market tells you,” he says. “First, look at the market carry for distant month futures. Then look at the basis.”

For a market carry signal, consider the Dec. '04 futures price vs. the March '05 price.

“For example, if December '04 futures are at $2.50 and March '05 is at $2.65, then the market is offering you 15¢/bu. to store it,” says Brees. “That added 15¢ can be secured through either a futures hedge or hedge-to-arrive contract to cover it. But if December is at $2.50 and March is at $2.52, then it probably doesn't pay to store your grain. No matter what, make sure your storage costs warrant holding on to the grain.”

For a basis signal, consider the harvest basis vs. the normal basis in the spring.

“Basis is typically weak (for many areas) at harvest because of the glut of corn,” says Brees, noting that it's about 30¢ under for northern Missouri at harvest. “That basis normally recovers after harvest. The recovery is normally from 10¢ to 20¢ better going into the spring. So if the March '05 futures are at $2.65 and the basis narrows by even 10¢, then the market is probably offering an extra 25¢ for springtime sales.”

Brees says basis is more predictable than futures market price. The UM Web site ( measures Missouri average basis movements over several years. “From 1999 through 2003, average corn basis for central Missouri was 30-35¢ under in September and October, compared to 15¢ under in March,” says Brees.

He notes that if the market carry or basis doesn't offer added profit potential, another strategy may be to sell cash corn, then re-own it with call options if higher prices are anticipated.

Alan Kluis, executive vice president of NorthStar Commodity Investments in St. Paul, MN, says '04 has been a good year for early marketing because of the strong early year prices. “Producers should already be 40-80% forward sold at $2.60-2.80,” he says. “If December futures prices are in the $2.50-2.60 range before or at harvest, they should get caught up with futures hedges.”

Kluis says the market has likely seen its high for the year, especially after the 80-million-acre plus corn acreage report in mid-summer, and indications that exports might be reduced. “With all the negative news, the attitude has swung 180Þ from late spring when corn prices were 0.80¢-$1/bu. higher and the trade was very bullish,” he says.

In addition, weak wheat prices in the $3.00-3.10 range dragged down corn prices in mid-summer. “I don't expect corn to rally much unless world wheat prices increase,” says Kluis.

He notes that with continued strong demand for corn by livestock feeders and the addition of new or expanded ethanol plants, there could be opportunities for solid future corn pricing. As for early 2005 sales, Kluis says many of his customers have already marketed a portion of next year's crop.

“We have already done 10-30% and would get more marketed if December '05 futures hit $2.70,” he says.

Bunnell monitors crop conditions, world situations and marketing trends via the Internet, DTN, trade publications and other sources. And if any '05 early marketing windows are there, he'll pre-price some of his corn.

“You really need to know your cost of production, then start there with a floor price,” says Bunnell. “Try to scale up in the latter part of spring and early summer with what you're comfortable with. You have to be satisfied with your sales — because you can't go broke making a profit.”

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