Are You a Grain Marketing Sinner?

By Tracy Sayler

Chances are, you’re a grain marketing sinner.  Ed Usset, a grain marketing expert associated with the Center for Farm Financial Management at the University of Minnesota, speculates that a majority of crop producers break what U of M grain marketing specialist, Stan Stevens, describes as the 11th Commandment: “Thou Shalt Not Hold Grain Longer Than July 1.”

“It’s one of the biggest marketing mistakes that producers make,” says Usset.

Here’s why: Quite often, producers hold grain after harvest and through the winter, hoping that prices go up.  If a market rally doesn’t occur by spring, they hold the grain even longer—most likely until they need bin space for the new crop. Almost always, however, the price of grain drops between August and October.

Usset has compared June and July corn, wheat, and soybean prices, to prices at harvest, going back to 1975.  Prices rallied 15 cents or more less than 20% of the time (see chart).

“The 11th Commandment is based on irrefutable patterns in the basis that after July 1, the cash price starts to lose ground to the futures price, and if you hold grain, you will more likely than not see a deterioration in price,” says Usset. “So by July 1 for wheat and corn, and by August 1 for soybeans, get rid of it, because history tells us that holding cash grain unpriced in the bin is a killer.”

If you still have last year’s grain in the bin, start making sales every month so you can meet Usset’s 11th Commandment this year, keeping seasonal highs in mind.  Thus, if you still have 20,000 bushels of wheat in the bin, consider selling 4,000 bushels at the end of March, 8,000 bushels in April, and 6,000 bushels in May.  If you feel you must retain some in case there’s an upside rally, keep 2,000 bushels to sell anytime during that period, but sell it by July 1 no matter what. 

“People say, ‘I don’t want to sell by July 1, because the market might go up.’ Well, buy a call option if you think the price is going to go up.  Producers will say, ‘but that costs money.’ But so does holding grain. The deterioration of the basis after July 1 is a more insidious way of losing money.  Like a hole in the water bucket, it’s draining, and you don’t even realize it.”

View your old crop as vulnerable to downside price movements, and the upcoming crop as your upside market opportunity. “Your upside is the bags of seed in your warehouse, waiting to be planted.”

Use the loan rate as your “line in the sand” to start pricing your new crop. “Don’t settle for anything less than that,” says Usset.  “I want to see at least $2.40 December corn, at least $3.40 September wheat, and at least $5.60 November beans.  Otherwise, I’m not going to consider any preharvest pricing. If prices stay below that through harvest, I’ll accept loan rate and LDPs if they occur, and then look for post-harvest opportunities.”