Be Forward Thinking with Forward Pricing

Think not only about pre-harvest marketing for 2003, but 2004

By Tracy Sayler

It sounds crazy: You still have grain in the bin from 2002, have not yet planted your 2003 crop, and now you should even be considering your pre-harvest marketing plans for 2004?

Exactly, says University of Minnesota grain marketing specialist Ed Usset, who believes grain producers need to be proactive in pricing their grain, taking into consideration their financial goals, cash flow needs, crop insurance coverage, anticipated production, and appetite for risk.

Be forward-thinking as well. That way, you’re not backed into a corner and forced to sell when you need the money or bin space. Why not sell at least a portion of your anticipated crop if prices meet or exceed your pre-harvest goals? There is no better example of why it’s prudent to be forward-thinking with forward-pricing than the price scenario late last summer and early fall.

Usset, who works specifically with the U of M’s Center for Financial Management, www.cffm.umn.edu is no stranger to grain marketing: Since 1999, he has led the Minnesota Master Marketer Program, which features short and long training sessions on marketing. Prior to his work with the U of M, he worked in the grain industry where grain futures and options were a daily part of his responsibilities.  In his marketing workshops, he outlines and executes specific pre-harvest marketing plans for a hypothetical farm that produces 84,000 bushels of corn, 23,000 bushels of soybeans, and 25,000 bushels of wheat each year.  “It is not an example of the perfect plan, but is useful as a basis for discussion with producers in the development of their own marketing plans.”

Early in 2002, Usset already had his pre-harvest marketing plan in place for 2003, with pre-harvest sales objectives divided into six equal sales of 2,500 bushels each. The initial –and minimum - pricing target was $3.10 cash price per bushel, or a futures price of $3.50 September wheat.

What was so special about using a cash price of $3.10 as a minimum pricing objective for the first sale?  “I view the loan rate as a minimum pricing threshold, and $3.10 was very close to my newly revised local loan rate,” says Usset.  “To price new crop grain at less than your local loan rate exposes you to a different type of risk – the risk of getting a final price that is less than the loan rate should prices rally higher before harvest. Loan rate is insult enough, so I am reluctant to take actions that could get me less than loan.”

When Minneapolis Sept ’03 futures closed at $3.67 on July 15, 2002—meeting his objective of a 15-cent premium above his initial price target of $3.50— Usset’s first sale for 2003 was at $3.65 using a hedge-to-arrive (futures fixed) contract, nine months before planting and 14 months before harvest.

A HTA allows a grower to lock in a futures price with the elevator, leaving the basis to be set at a later time. The elevator will establish a hedge in the futures on your behalf in exchange for delivery of the cash commodity at a set time.

The price run-up late last year triggered another sale in August, three in September, and one in October. All exceeded the 15-cent price premium needed to make these early sales, as outlined in the marketing plan. By deer hunting time last fall, Usset’s hypothetical farm already had 60% of its 2003 crop priced at an average price of $3.99 Sep futures.

Once the minimum pricing target is achieved, all other pricing targets in Usset’s pre-harvest marketing plan incorporates a decision date (ie “… or by March 18”). “These decision dates are important. Price targets are needed but often times the market does not cooperate with our aims,” he says.

Decision dates are clustered in the spring, when futures prices have tended to be higher over the past two decades.

Following is Usset’s pre-harvest marketing plans for 2003 and 2004.  Use them as a guide for your own planning. Questions? Contact Usset by email, usset001@umn.edu or visit his web site, www.apec.umn. edu/faculty/eusset/mkgplans.html. Click on the link “Rationale Behind Pre-Harvest Marketing Plans” for more background on establishing a pre-harvest marketing plan.  Or, visit with a grain marketing professional.

Corn 2003 Pre-Harvest Marketing Plan

Objective: Buy crop insurance to protect my production risk, and have 70% of my insured (APH) corn crop priced by late May.

Price 10,000 bushels at $2.00 cash price ($2.50 Dec. futures) using forward contract/futures hedge/futures fixed contract.

Price 10,000 bushels at $2.12, or by Mar. 18, using some form of fixed price contract.

Price 10,000 bushels at $2.24, or by April 16, using some form of fixed price contract.

Price 10,000 bushels at $2.36, or by April 30, consider options or a trend system.

Price 10,000 bushels at $2.48, or by May 16, consider options or a trend system.

Price the last 10,000 bushels at $2.60, or by May 30, consider options or a trend system.

•  Plan starts on November 1, 2002. Earlier sales will be made at a 15 cent premium to price targets noted above.

•  Ignore decision dates and make no sale if prices are lower than $2.00 local cash price/$2.50 December futures.

• Exit all options positions by mid-September.

Soybeans 2003 Pre-Harvest Marketing Plan

Objective: Buy crop insurance to protect my production risk, and have 70% of my insured (APH) corn crop priced by late May.

Price 2,500 bushels at $5.05 cash price ($5.55 Nov futures) using forward contract/futures hedge/ futures fixed contract.

Price 2,500 bushels at $5.20, or by March 18, using some form of forward contract.

Price 2,500 bushels at $5.35, or by April 2, using some form of forward contract.

Price 2,500 bushels at $5.50, or by April 16, consider options or a trend system.

Price 2,500 bushels at $5.65, or by April 30, consider options or a trend system.

Price 2,500 bushels at $5.80, or by May 16, consider options or a trend system.

Price my last 2,500 bushels at $5.95, or by May 30, consider options or a trend system.

•  Plan starts on October 1, 2002. Earlier sales will be made at a 15 cent premium to price targets noted above.

•  Ignore decision dates and make no sale if prices are lower than $5.05 local cash price/$5.55 November futures.

• Exit all options positions by mid-September.

Spring Wheat 2003 Pre-Harvest Marketing Plan

(Includes pricing actions and changes as of February, 2003)

Objective: Buy crop insurance to protect my production risk, and have 70% of my insured (APH) spring wheat crop priced by late May.

Price 2,500 bushels at $3.10 cash price ($3.50 Sep. futures) (HTA @ 3.65 on 7-15-02).

Price 2,500 bushels at $3.20, or by Mar. 18 (HTA @ 3.78½ on 8-16-02).

Price 2,500 bushels at $3.30, or by Mar. 30 (HTA @ 3.98 on 9-6-02).

Price 2,500 bushels at $3.40, or by April 16 (HTA @ 3.98 on 9-6-02).

Price 2,500 bushels at $3.50, or by April 30 (HTA @ 4.10 on 9-9-02).

Price 2,500 bushels at $3.60, 3.75 , or by May 16 (HTA @ 4.19 on 10-15-02).

Price 2,500 bushels at $3.70, 3.85 , or by May 30.

•  Plan starts on September 1, 2002. Earlier All sales will be made at a 15 cent premium to price targets noted above.

•  Ignore decision dates and make no sale if prices are lower than $3.10 local cash price/$3.50 September futures.

Corn 2004 Pre-Harvest Marketing Plan

Objective: Buy crop insurance to protect my production risk, and have 75% of my insured (APH) corn crop priced by early June.

Price 10,000 bushels at $2.00 cash price ($2.50 Dec. futures) using forward              contract/futures hedge/futures fixed contract.

Price 10,000 bushels at $2.12, or by March 6, using some form of fixed price contract.

Price 15,000 bushels at $2.24, or by April 5, using some form of fixed price contract.

Price 10,000 bushels at $2.36, or by May 4, consider options or a trend system.

Price 10,000 bushels at $2.48, or by May 18, consider options or a trend system.

Price 10,000 bushels at $2.60, or by June 3, consider options or a trend system.

•  Plan starts on November 1, 2003. Earlier sales will be made at a 15 cent premium to price targets noted above.  Ignore decision dates and make no sale if prices are lower than $2.00 local cash price/$2.50 December futures.

•  Exit all options positions by mid-September.

Soybeans 2004 Pre-Harvest Marketing Plan

Objective: Buy crop insurance to protect my production risk, and have 75% of my insured (APH) soybean crop priced by early June.

Price 2,500 bushels at $5.05 cash price ($5.55 Nov. futures) using forward             contract/futures hedge/futures fixed contract.

Price 2,500 bushels at $5.20, or by Jan. 7, using some form of fixed price contract.

Price 2,500 bushels at $5.35, or by Feb. 6, using some form of fixed price contract.

Price 2,500 bushels at $5.50, or by March 6, using some form of fixed price contract.

Price 2,500 bushels at $5.65, or by April 5, consider options or a trend system.

Price 2,500 bushels at $5.80, or by May 4, consider options or a trend system.

Price 2,500 bushels at $5.95, or by June 3, consider options or a trend system.

• Plan starts on October 1, 2003. Earlier sales will be made at a 15 cent premium to price targets noted above.

• Ignore decision dates and make no sale if prices are lower than $5.05 local cash price/$5.55 November futures.

• Exit all options positions by mid-September.

Spring Wheat 2004 Pre-Harvest Marketing Plan

Objective: Buy crop insurance to protect my production risk, and have 75% of my insured (APH) spring wheat crop priced by early June.

Price 5,000 bushels at $3.10 cash price ($3.50 Sep. futures) using forward               contract/futures hedge/futures fixed contract.

Price 5,000 bushels at $3.30, or by April 5, using some form of fixed price contract.

Price 5,000 bushels at $3.50, or by May 4, consider options or a trend system.

Price 5,000 bushels at $3.70, or by June 3, consider options or a trend system.

• Plan starts on September 1, 2003. Earlier sales will be made at a 15 cent premium to price targets noted above.

• Ignore decision dates and make no sale if prices are lower than $3.10 local cash price/$3.50 September futures.