DON’T CALL ME AN EXPERT - This is just the way I do things

Marketing New Crop Grain

By Mike Lockhart

Our farm is located in Becker County near the corner where Clay, Becker and Norman counties come together near the town of Ulen. My wife, Carol and I live on a farm we bought from her grandmother. We grow mostly wheat and soybeans, but had some corn last year and have raised sunflowers and barley in the past. I continue to raise some seed but not for the Minnesota Crop Improvement as in the past.

I will tell you a little history about my experience with marketing. I graduated from NDSU in Ag Education in 1975 and went to work as a farm management instructor, which I continue to do through the Northland Community Technical College based in Thief River Falls. I looked at working with farmers to improve their business, help them make more money, allow them to have more free time and maybe help them bring a family member into the business – basically, whatever their farm business needs were.

I noticed that as a whole, farmers were pretty much all producing the same thing. Marketing wasn’t being considered, but those who could cut costs and not hurt yields were slowly getting ahead. In 1980 however, when the Russian embargo came along, I saw spring wheat futures at $4.60, a local cash price at $3.20, and a minus -$1.40 basis. I thought this was wrong, but how could I make this work?

I found out that a trucker I knew had sold the futures and was delivering grain against that contract. It got me thinking that this should work for me as a producer as well. As a result, it got me excited about marketing because I could see I have a choice.

As a matter of fact, lots of choices.  Over the years I’ve looked at the futures, the local price, the farm program, and how to make it all fit together. So here’s what I look at in my farm and the five marketing groups that I work with. I look at a market plan like it was a road map: if I’m at ‘point A,’ how can I get to ‘point B?’ The goal is to plant a crop at a particular price. That’s what I’m in the business for, to sell my crop.

So let’s make a road map, focusing on wheat, corn and soybeans.  I personally prefer these over other crops such as barley and sunflowers where only a few set the price and the discounts.  With wheat, corn, and beans, there are many involved with price and a pretty set list of discounts are in place most of the time. These crops also have a market- driven crop insurance price. And I know from the past that these crops have seasonal movements, ranging every year from 20 to 50% of their value. They also have LDPs, and best of all they have a bottom, called a CCC loan. All these things help me price my crop.  They all have influence on my decisions. 

I start my road map (marketing plan) in the fall of the year before the crop is produced with a quick breakeven worksheet. So for the new crop coming up, it’s more like revising the 2004 breakeven to reflect any big changes in my operation that I expect for 2005. At this point, looking at the breakeven numbers, I know roughly if I plant a certain crop what I need for a price to make money.

Already last fall, I was only looking at future prices for fall 2005 and later because basis that far out are usually “cash plus.”  A cash plus contract would allow me to receive a higher price for bushels delivered to the elevator in exchange for a firm offer for 2005 crop grain. Figuring my breakeven and making advance sales usually has me in the ballpark of where I want to be pricewise. I have sold December wheat as much as a year and a half ahead of harvest because it was a good futures price.

Sales strategies as spring draws near
As February comes around I pay particular attention to corn, soybeans and wheat futures prices, because the crop insurance program prices for RA and CRC are being established during February. For example, November soybeans future for the month of February and December corn futures for the month of February. This gives me a target to price my crop higher than the insurance prices.

About this time I also figure my final breakeven price and what I call my “Wal-Mart price” (20% over my breakeven) and I put a selling plan together; sell 10% spring wheat at $3.70 December future, 20% at $3.90 December or whatever. I want to be up to 60% sold (or my insurance levels) by May 10^th on wheat, May 10^th for soybeans and April 10^th for corn.

I like three sales per crop because selling is sort of a pessimistic choice for me, “It’s not going any higher so I better sell” and I hate to have that feeling any more than need be. I will then save the remaining 40% for after harvest sales or put options if things go crazy and continue higher. Remember the object is to sell the crop, leave speculation to the funds.

Here is an example of what I’m doing this year for spring wheat: I am looking at 10 to 20% sales at $3.70 December futures, 20% sales at $3.80 December and 20% at $3.90 December futures – that leaves me 40% unpriced. If the market starts moving faster than expected, I lift my orders and put in a ‘good-when-touched’ sell order 7 or 8 cents below the futures market.

‘Good when touched’ is different than a ‘good-till-canceled’ order. A sell order below the market will get filled immediately unless you put a good-when-touched order with it. A good-till-cancelled (or open order) is an order to a broker/merchandiser to sell at a specified price, which remains valid until executed or cancelled.

I move my good-when-touched order up each day after the close so the order stays below the futures market 7 or 8 cents. I never move it down. As it goes through my sale plan, I add these bushels to my trailing sell order because I have the market trapped higher than the planned sale prices. It worked great on all the crops last year.

About that same time I start working on our local elevator manager for zero or maybe -.10 basis for December. Then I consider the LDPs program.  Collecting an LDP really doesn’t do me any good unless I have priced grain. I’m planning for a $.35 to $.65 LDP. A number of years I had $.60-plus wheat LDPs. A great LDP only happens if cash is like $2.80 or lower so that doesn’t work unless you have the $3.80 locked in. Example: $3.80 December future plus basis “0” = $3.80 + .35 LDP = $4.15 (not a bad price).

I figure LDPs taken on unpriced grain is a train wreck waiting to happen, and I want to remember that a real bad basis and protein at harvest make real good LDPs. I usually plan to have the rest of my wheat priced by deer hunting.

I have made it a point as well to know the average price movements, because it helps provide a baseline for pricing grain. For example, the average movement in November soybeans future from January to November is $1.74, and the average movement for December corn from January to December is $.71. These are examples of things you need to know to make marketing fun and it is fun for me – even if I have to learn a few new things the hard way each year!

Bottom line is that marketing is a multi-step process. Look at the tools available to you. This farm program is the best tool I have to making money marketing. There is flexibility and choices.

Looking back at the Russian grain embargo, maybe there was a silver lining, at least for me. It got me looking at the mechanics of marketing grain. Before then, a guy would harvest the grain, sell when needed after it was in the bin, and hope you end up with a profit.  That’s not the best marketing plan.  It’s better to know what price you need/want, then use the programs and tools available to get it.

See a more in-depth article on how Lockhart calculates his
“Wal-mart price,” along with a breakeven worksheet example, online at http://www.smallgrains.org/springwh/Apr04/walmart/walmart.htm