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Lock In Profit When You See It

Knowing their exact cost of production is the first step to successful marketing, said John Anderson, who farms 7,500 acres with brothers Aaron and Matt near Norfolk, Nebraska.

When market prices offer a profit, they make a sale.

John said they didn’t always have a good handle on their breakeven, but working with a spreadsheet provided by their Farm Credit Services of America (FCSAmerica) financial officer, Matt Hoesing, they feel confident they do today.

Overhead and miscellaneous costs are the hardest, he said.

“We use university custom rates for equipment costs, but inflate them to be on the safe side,” he explained. “Matt also helped us nail our costs based on those of other customers.”

John said he liked marketing in school, but it took a close association with a broker he trusts to jump-start his marketing plan.

“We thought about hedging and options,” he said, “but didn’t really use them until we got to know a local commodity broker. Now we set targets and he helps with the timing. He also provides additional discipline.”

The brothers use futures rather than options in most cases, though they may buy call options on 20 percent of their crop in case of a harvest rally.

“In 2008, we sent $100,000 to Chicago in margin calls. That was hard,” John recalled. “Even though it shouldn’t matter in a hedge, it’s easier when you get money back.”

Their broker also has helped them with some strategies such as initially hedging in December corn futures and then rolling out to July.

“We pick up an average of 10 cents on each roll,” John said.

They also merchandise their grain, locking in prices on futures strength but locking in basis when it is favorable – often when prices are low.

They moved hedges of 2015 corn to 100 percent by the summer of 2016 and were already at 50-60 percent on 2016 corn ahead of harvest. They also priced some 2017 corn a year ahead. They didn’t sell a bushel of 2015 corn under $4, though they did sell some 2016 production in the $3.80 range, according to John.

“Compared with the $8.50 soybean market at the start of last year, we ended with a really good year,” John said. “We got a chance to sell all our 2015 soybeans into the cash market in July, and last summer, we also moved new-crop soybean sales close to 90 percent. As soon as we got into a breakeven or profitable level, according to the budget, we started selling beans.”

“We were able to just keep scaling up our sales and average price. We didn’t sell a lot at the top when unexpected price strength carried beans over $11, but we did average over $10.”

Advance marketing helps the Andersons meet cash flow needs, including when they buy fertilizer in October-November or January-February time frames. When committing in advance, the brothers view Revenue Protection – which they carry at the 80-85 percent level on corn and soybeans – as crucial.

“It means we can afford to sell ahead knowing that crop insurance would cover us if we didn’t grow enough to meet the contract,” John explained.

Looking ahead to the 2017 crop, the brothers have reduced the number of acres they rent and negotiated a 20 percent reduction in rent on one farm. With their insurance locked in and most inputs purchased, John said, “I believe the marketing opportunities will come. We just have to be ready.”

Click to view full report on Grain Marketing Survey: Producer Practices and Attitudes.

Click to view the Factors That Affect Marketing.

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