Betsy’s Bulls and Bears

Making ‘04 Crop Forward Sales

By Betsy Jensen
Ag Commodity Instructor, Northland Community and Technical College, betsy.jensen@northlandcollege.edu

Like a kid in a candy store, I stare every day at the price quotes lately and just drool.  We have some great prices available to us for the 2004 crop year, and it’s still early.  We had a good price election for CRC and RA insurance, and it looks like things may go our way in 2004, if we can just produce a crop.

My skepticism is strong, however.  Although the outlook looks rosy now, what will it look like in August?  Will we have burned-up soybean fields with $9 futures, or lush green fields with $5 futures?  Will the wheat harvest thrill us or bankrupt us?   Which way do we gamble for 2004?

With average yields, we should be able to make some money in 2004, based on current price levels. That is what I try to keep reminding myself when making forward sales. I try not to remember selling soybeans at $5 .25, while my neighbors delivered at $8. Last year is still very memorable for many of us, but try to think of marketing in terms of the last 5 years, or even the last 10.  Would you have taken $4 wheat futures, $2.85 corn and $6.75 beans? Most years those prices would have caused a riot in the streets because farmers would have been so happy.  This year we look at prices and say “No thanks.”

I know many of you have made some small new-crop sales for 2004, and I congratulate you.  Now we need to decide how far to push the sales.  Since prices are profitable, I’m pushing for 2/3 sold and if prices get really profitable, buy put options on the remaining 1/3.

For each farmer the amount to pre-sell will be unique. Some farmers will be comfortable selling only 25%, while others are OK forward contracting 50 % or more of their anticipated ’04 production. Try to determine the sales level that works for you, but if prices are profitable, push sales a little farther . Call me crazy, but nothing sounds better than making money, and being able to pencil in a profit.  Keep in mind that more often than not, grain prices decline between planting time and harvest.

That’s a good reason to consider put options, which allow you to take advantage of higher prices, but keep the upside potential open.  I will warn you that put options are going to look incredibly expensive, which is why you need to use a combination of forward sales and put options.

Is there any way to avoid what happened with soybeans in 2003? What if we sell too early and watch prices rally?  To me that is an acceptable risk. I’m more concerned about what will happen if we don’t sell, and prices fall.  Wheat is profitable at $4 and $5, but not so profitable at $3. There may be opportunities during the summer to reown sales using call options, but once again those are going to look very expensive.  We would all be millionaires if we could have predicted the short soybean crop of 2003.  Unfortunately my crystal ball isn’t as clear as I would like. I can’t predict a short crop, so I’ll just stick with my projections of an average crop.

So forward sell, but don’t sell more than you’re comfortable selling.  My default amount is always 50%, because then you’re either half right or half wrong. It’s the happy medium, and it should allow you to sleep at night.  Consult with your grain market advisor or local elevator about forward -selling opportunities available to you. When we have opportunities to make money, it’s our job to take advantage of them – they don’t appear that often. 

Jensen farms with her husband Brian near Stephen, Minn.  Her market education activities including this column are supported in part by the Minnesota wheat checkoff, directed by the Minnesota Wheat Research and Promotion Council. If you have a question or topic related to marketing that you’d like to see addressed in this feature, call 1-800-242-6118, or email Jensen: betsy.jensen@northlandcollege.edu .