FCSAmerica Staff Reports
| Jan 10, 2017
When it comes to controlling costs, look at the big items. When it comes to marketing, dimes and quarters count. That was the message at this year’s GrowingOn® meetings.
Farm Credit Services of America (FCSAmerica) hosts GrowingOn to help producers prepare for the coming season with economic updates, marketing insights, crop insurance information and more. GrowingOn 2017, which continues into January, highlights three case studies of real solutions producers implemented in the past year to sustain their operations through today’s challenging market.
While fertilizer (15 percent) and seed (14 percent) are the biggest variable costs, most producers already have trimmed these – and further cuts could hurt yields. Controlling fixed costs, such as land (24 percent), family living (12 percent) and machinery (11 percent), continue to be important to profitability in 2017.
Every producer needs to develop a marketing strategy based on timing and pricing to maximize their earnings.
“Make the decision to get something done when the market rallies,” said Steven Johnson, Iowa State University farm and ag business management specialist.
To illustrate his point, Johnson pointed to December 2016 corn futures. During the February crop insurance guarantee period, futures averaged $3.86. Corn futures typically don’t rally until the spring months. That’s because 85 percent of the world’s corn is produced in the northern hemisphere, according to Johnson. By mid-June, futures rallied 60 cents to almost $4.50, shortly after which they plummeted. The October-based harvest price averaged $3.49.
“That’s a seasonal rally,” Johnson declared. “It has happened in the corn market each of the past six years – as it does most years.”
Soybean futures typically have a spring/summer rally, but price spikes also can occur in the late fall/early winter if South American production looks uncertain, he added.
The trick, he said, is to use the seasonal rally to price new crop as well as stored old-crop bushels. Last spring, for example, producers had an opportunity to scale in sales at $4, $4.10, $4.20, $4.30 and $4.40. Once it stalled at $4.49, that opportunity was over because corn futures dropped so far so fast.
“Don’t get caught up in greed and ego as the market rallies,” Johnson cautioned. “Farmers often feel if they take $4 and it goes to $4.40, they won’t have bragging rights – they missed the top. But think about how you’ll feel if it reaches $4.40 and then plunges to $3.49 by harvest.”
Marty Merchandiser, a FCSAmerica producer whose marketing strategies served as one of the case studies at GrowingOn 2017, uses Revenue Protection insurance and pre-harvest marketing to maximize profits.
Like all good marketers, Johnson said, Marty knows his break-even, which, last year were $3.40 for corn with an APH (Average Production History) of 182 bu./acre, and $9.30 for soybeans with an APH of 52 bu./acre. Marty also knows that he needs about $600,000 in cash flow during the fall and winter to make payments on term loans and an operating line of credit.
Marty buys 85 percent Revenue Protection (RP), so about 155 bu. of his corn APH are covered by insurance. At $3.86, his revenue guarantee is $597 an acre. He is willing to market up to 70 percent of his APH, or 127 bu., before harvest to generate his cash-flow needs. He generally uses futures hedges or hedge-to-arrive contracts with a local ethanol plant. He will deliver in December, when basis tends to narrow.
He stores the remainder of his unpriced bushels on the farm. Basis typically narrows in April-June, so Marty contracts in the cash market for spring delivery and uses July basis contracts as he waits for the seasonal futures rally.
“I’m a big proponent of selling for cash as processors seek to shake some supplies out of farmer bins,” Johnson said, adding “and buy July futures to replace ownership of those bushels. That stops storage costs and makes cash available.”
Soybeans are somewhat less certain to rally seasonally because South America’s supplies flood the market. So a minimum price contract might be a better choice for beans.
Calculate your 2016 cost of production once you know your actual yields, Johnson added. In the case of Marty, higher-than-expected yields drove costs down to $3.10 and $8.05. This makes marketing the remaining unpriced bushels much easier.
Which Tool to Use
The matrix below helps explain Marty’s pricing choices:
- A pre-harvest hedge or hedge-to-arrive contact is based on the expectation that prices will head down from the seasonally strong spring period, and basis will strengthen after his delivery period.
- Lock in cash prices on stored grain once basis strengthens post-harvest. Marty expects futures to strengthen seasonally into the growing season.
As the illustration shows, there are a variety of tools that work in those situations. The important factor: Consider separating futures price from basis and not just accept the spot cash price.
Johnson reminded the audience that the Commodity Credit Corporation (CCC) marketing loan is not a marketing strategy – it is just access to cash at a relatively low interest rate.
“Even with corn ending stocks forecast at their highest levels in nearly 30 years, market opportunities exist. You just have to know your cost of production, including the cost of ownership, and focus on profitable sales opportunities, keeping emotion out of the picture.”