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New Year
Opportunities
by Ed Usset
Grain Marketing Specialist – University of Minnesota
With corn, soybean and wheat prices creeping steadily higher since they
bottomed in December, it’s time to sit up and pay attention to
new-crop pricing opportunities.
I know $4.50 December 2009 corn contract isn’t close to the $6 of last
September, but that ship has sailed and we need to readjust our thinking
to the realities of a new year and new market.
With November 2009 soybeans around $10 ($2 above Dec. 5 close and equal
to early October prices) and September 2009 spring wheat around $6.75
($1 higher than early December lows), more opportunities exist.
Five weeks of higher prices is good news, but, as they like to say in
the fine print, “Past performance is not a guarantee of future
results.” But I digress from my goal to help you get back to the
basics of preharvest marketing.
As University of Minnesota grain marketing specialist, I have spent more
time listening to growers than doling out an upcoming market outlook. I
do that because I think growers need to start their marketing with a
different approach – one that doesn’t begin with the market
outlook.
Listening to producers, I have learned that very few had a plan to
improve their marketing results. So now I talk to them about minimizing
or eliminating mistakes made in grain marketing, which is one aspect I
write about in my book “Grain Marketing is Simple” (www.cffm.umn.edu/simple/).
Read on to learn more about my simple approach…and there’s a video
at the end of this newsletter where I talk through this approach to
grain marketing.
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Preharvest Marketing:
Writing The Plan
Be a proactive grain marketer with a plan – not
reactive or overactive. Reactive marketers sell when a bill is due or
before harvest to make bin space. Overactive marketers feel compelled
(or pushed by market advisors) to rebuy or resell grain to cover every
bushel sold.
My proactive marketing plan boils down to simple written objectives,
pricing targets, decision dates and the pricing tools you will use. To
check out my actual 2009 grain marketing plan, and get fill-in-the-blank
templates, visit www.cffm.umn.edu/GrainMarketing/MarketingPlans.aspx
on our University of Minnesota’s Center for Farm Financial Management
Web site.
I always emphasize my basic, “non-sexy” preharvest selling mantra
during my many talks to growers across the country every year, as well
as in my book.
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Your
Objective
First, estimate your expected total production in
bushels, decide how much revenue-based crop insurance you need to
protect production risks, then decide on minimum and maximum pricing
targets. Your objective should state what you want to accomplish before
harvest. I chose to insure 75% of my crop, then have that amount of crop
priced by early June.
Next, divide your production into sales lots that match futures
contracts (multiples of 5,000 bu.). I like to plan on six to 10 sales,
then I write down my price goals and calendar dates and pricing tool for
each sale. In my 2009 plan, written in August, I split 75% of my
90,000-bu. total into six sales of 10,000 bu. and one sale of 5,000
bu.
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Minimum And Maximum
Pricing
Minimum Price. I begin my minimum price
strategy based from cost of production, then set each minimum target
price 20¢ higher than the previous sale. I set my minimum price last
August at $3.85 cash/$4.25 December 2009 futures.
I may lower my minimum price in the near future, perhaps to $3.50, since
I see my cost of production dropping for 2009 as input costs drop.
Maximum Price. The maximum price objective is set to occur on the
last sale date. It sets the pace for every other price objective above
the minimum. But keep it realistic, and realize that this number is the
least important number in your plan. One way I establish an
“up-factor” from my base price is to take an average of the three
best price rises from Jan. 1 forward.
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Decision
Dates
By writing down dates, it makes a marketing plan a
real plan for action. I scheduled my seven decision dates within the
March to May time period, when new-crop prices tend to be the highest
– but not always.
Once you reach each decision date, if the current price is below your
minimum target, ignore the date and make no sale. And then I’ll have
growers ask what happens if prices never get back to that target? I tell
them to be patient, then look toward the other half of your marketing
plan – which is postharvest marketing.
Many market advisors won’t let clients sit still, wanting producers to
use puts, calls, reverse positions, double it up, etc. I say be patient,
and if you don’t know what to do with your time, look at ways to screw
down your cost of production.
I generally start my plan on Jan. 1. Earlier sales can be made at a 30¢
premium to price targets noted in your plan, limited to about one-third
of your crop.
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Pricing
Tools
I like using straightforward, low-cost pricing tools
(forward contracts, futures hedges or hedge-to-arrives) during the
generally cheapest first four sales. Basis and storage capacity are the
key deciding factors in choosing between these tools.
Then in my last three sales, I consider the use of options or a
trend-following system. For me, the purchase of options to establish a
minimum price is most appealing when the market is trending higher.
Options are appealing but costly, and I always look for a less costly
way to market grain.
Listen to Usset expand on this topic at cornandsoybeandigest.com/consistency_counts_asgrow.
And you can follow Ed’s grain marketing blog at edsworld.wordpress.com/.
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