Consider Production Guarantee-Based Grain Sales

There are different plans for marketing grain, with no set rules for establishing objectives for selling prices and selling timelines.  The point is to get something – anything – down on paper to help provide a semblance of strategy in selling what you produce.

Here are some examples from Betsy Jensen, ag commodity instructor, Northland Community and Technical College. Jensen facilitates a number of grain marketing groups in northwest Minnesota and ‘practices what she preaches’ on her and husband Brian’s farm near Stephen, Minn.

In these examples, she suggests establishing sales goals based on your CRC/RA production guarantee – a plan which may hold particular appeal to conservative marketers. Sell a portion of your guarantee whenever a price or time deadline is reached. Again, time deadlines are arbitrary, but it makes sense to bunch time deadlines to make sales around the times of year when prices are seasonally at their highest.

She suggests keeping these points in mind as you market your ’05 crop (and remaining old crop):

• Don’t expect large price swings in 2005. That doesn’t mean they can’t happen. But with a rebuilding in stocks, large price swings will be less likely compared to 2004.
• Consider “tightening up” your marketing plan, using lower price targets compared to ’04.
• Accept the fact that you might make a few sales that just barely cover your costs of production.  But selling incrementally helps improve your chances.
• Watch and try to take advantage of any carries in the market – when prices in far away futures months are higher than the nearby months.  If the price is attractive, make advance sales.
• Keep in mind that historically, prices are usually at their highest during the spring, then slide as harvest (new crop supply) approaches.
• Keep the LDP in mind, and remember the option of using a 60-day Posted County Price lock.  Brush up on LDP trends online at www.ag.ndsu.nodak.edu/aginfo/cropmkt/pubs/EC-1214.pdf and the 60-day PCP lock at www.smallgrains.org/springwh/MGuide00/pcp/pcp.htm.
• Track your local basis.  Watch your local cash price, because very often since last harvest, that’s where the action has been.
• If you’ve been holding poorer quality grain to avoid discounts, make plans to sell or blend it off this spring.

More Marketing Plan Examples
Ed Usset, grain marketing specialist for the University of Minnesota’s Center for Farm Financial Management, has pre and post-harvest marketing plans for wheat, corn, and soybeans online at www.cffm.umn.edu/Marketing.  Click on the “Marketing Plans” tab at the top. 

George Flaskerud, NDSU extension grain marketing specialist, provides examples and information to follow as well, online at www.ag.ndsu.nodak.edu/aginfo/cropmkt/cropmkt.htm.

SDSU 2005 Commodity Price Outlook
South Dakota State University’s 2005 Commodity Price Outlook is available online. The 49-page document covers corn, soybeans, wheat, hay, cattle, hogs, and dairy, with additional sections dealing with crop costs and land values.

Go to the web site: http://econ.sdstate.edu/Extension/CMA.htm . Click on any of the market links – corn, soybeans, wheat, cattle, hogs, or dairy – to find the link to EMC 926, “Commodity Price Outlook 2005.” These links also have good weekly reviews and basis information.

Authors of the publication are SDSU Extension economists Al May, Matt Diersen, Jack Davis, Burton Pflueger, and SDSU Extension educators Heather Gessner and Don Guthmiller.

Following are SDSU’s outlook highlights for wheat, corn, and soybean fundamentals.

Wheat
Current estimates of winter wheat acres planted in the U.S. for the 2005 crop year stand at 41.57 million acres, down 4% from a year ago.  This continues a downward trend in winter wheat acres in the U.S. from a year ago when planted acres were approximately 3% lower than in 2003. Although the current estimate of winter wheat planted acres is down again this year, the market seems unwilling to put any premium into the wheat price. The market’s primary focus appears to be on the anticipated growth of ending stocks from the 2004 crop and whether that trend will continue by the end of 2005. While planting expectations of winter wheat and other classes of wheat in the U.S. could play a possible role in price direction, those expectations will only play a role in terms of the impact on carryover supplies of wheat in both the U.S. and worldwide.

It is important to remember that while the U.S. is one of several large wheat producers in the world, the U.S. crop in 2005 will not be the only factor that will impact the price levels of wheat in the U.S. and worldwide. Production in other countries will play a key role in price levels and it is highly likely that prices for wheat will be especially sensitive to growing conditions in the U.S., Canada, and Australia. Production problems in China would also lead to the potential for greater wheat exports to that country. The United States, Canada and Australia would all compete very vigorously for that market if China indeed is in the market to purchase more wheat than expected.

Prices will also be sensitive to expectations for world consumption in 2005. Since world consumption for the current marketing year has made a turnaround from a year ago, the wheat trade will watch this category with interest to see if consumption continues to grow into the next marketing year. If world consumption can again outpace world production as it did from 2000 through 2003, this would mean a return to declining world carryover stocks that would, in turn, give some support to wheat prices. However, if world production outpaces world consumption 2005-06 marketing year, prices would continue to be pressured.

Exports will also play a key role in pressuring or supporting prices. U.S. wheat is always faced with the challenge of competing with other exporting countries for the export market. The U.S. will continue to face aggressive competition for a share of the export market from Canada and Australia in 2005-06. Exports will have to be at least as strong, or greater, in 2005-06 as the estimates for the current year to maintain current prices. A downturn in exports combined with a greater production level in the U.S. will undoubtedly drive U.S. stocks higher and put pressure on domestic wheat prices.

U.S. and world carryover supplies of wheat will be instrumental in determining what may be the longer term trend for wheat prices. If wheat carryover supplies move higher during the 2005-06 marketing year continuing the growth from 2004-05, wheat prices will likely fall below price levels of early 2005 ($3.00 - $3.50). However, if a combination of production and demand factors leads to another decline in U.S. and world carryover supplies of wheat, prices in the region would most likely stay at levels of $3.00 to $3.50 or greater, depending upon the amount of decline in carryover wheat supplies.

It is important to evaluate production costs and to create a marketing plan in order to capture cost of production and profit. It will be important to evaluate forward pricing strategies that will lock in a floor price with a hedge, a cash forward contract, or with a put option. These strategies will protect against any price decline after the pricing strategy is employed. In addition, this year may offer opportunities to take advantage of rising prices after a floor price has been locked in either through a futures hedge or a cash forward contract. This could be accomplished by purchasing at the money or out of the money call options. This strategy is often referred to as a synthetic put. Option premiums will likely be an issue that determines the purchase of at-the-money or out-of-the money options.

Corn
The first indicator of potential 2005 production will come in the form of USDA’s Prospective Plantings report on March 31. If U.S. farmers indicate they might plant additional acres of corn in 2005, this will very likely pressure old and new crop corn prices well into the planting season and through June of 2005 when the final Planted Acreage report is issued by USDA.

The next obvious factor will be the growing conditions during the summer of 2005 and expectations during that time of the size of the national corn crop. If production is estimated by USDA to match the record crop of 2004, prices will very likely be pressured below the $2.00 level and below loan rate levels even if usage levels continue to grow for U.S. corn. Demand growth in the U.S. and worldwide will likely not be strong enough to support current price levels if the U.S. produces a corn crop in 2005 that is equal to, or larger, than the 2004 crop. If demand, for whatever reason, begins to shrink during 2005, then production levels would need to drop significantly in 2005 to maintain current price levels.

On the other hand, if production in the U.S. slips back to the 10 to 11 billion bushel level or lower in 2005, and demand continues to remain strong, cash corn prices will likely rise to levels above the $2.00 mark or greater. Prices will likely be sensitive to weather and growing conditions in 2005 as in any previous year.

It is important to evaluate production costs and to create a marketing plan in order to capture cost of production and profit. Due to the possibility of another very large corn crop in 2005, it will be important to evaluate forward pricing strategies that will lock in a floor price with a hedge, a cash forward contract, or with a put option. These strategies will protect against any price decline after the pricing strategy is employed.

In addition, this year may possibly offer opportunities to take advantage of rising prices after a floor price has been locked in either through a futures hedge or a cash forward contract. This could be accomplished by purchasing at the money or out of the money call options. This type of strategy is often referred to as a synthetic put. Option premiums will likely be an issue that determines the purchase of at-the-money or out-of-the money options.

With any of these strategies, it will still be important to know the county loan rate value for corn so that any of the above-mentioned combinations do not establish a floor price for corn that is lower than loan rate.

Soybeans
World production of soybeans has increased each year since 1995 with the exception of 2003.  The lower production in the United States in 2003 did have an impact on prices.  Prices rose dramatically between August of 2003 and April of 2004. However, the rather dramatic turnaround in U.S. production in 2004 had an almost equal influence in driving prices back to the $5.00 level by the beginning of January of 2005.

Demand for soybeans worldwide has shown consistent growth over the last 20 years and it is likely this trend will continue in 2005. At the same time, there is no question that the expansion of soybean production in South America shows little sign of slowing. Although Asian rust is a current concern in South America, the impact of this plant disease on South American soybean yields in 2004 was relatively minimal. The impact on 2005 production will become clear only when the South American harvest is completed this spring.

The discovery of soybean rust in the U.S. in late 2004 may also be a factor for production, but only if there is widespread infection or if significantly fewer acres of soybeans are planted due to fears of this disease. Since there is obviously no way to determine the extent of either situation at this time, the primary factors of current supply and demand should still be viewed as those having the most influence on this market at least for early 2005.

With current supplies of soybeans at record setting levels in both the U.S. and worldwide, there is a strong likelihood that soybean prices in the region will remain pressured at levels around $4.80 to $5.25 or lower well into the spring and early summer of 2005. It will be important to watch for USDA’s Prospective Plantings report at the end of March of 2005 and the final Acreage Report issued in June of 2005 to see if U.S. farmers plan to lower the number of acres they intend to plant to soybeans in 2005.

If U.S. plantings and projected production for 2005 appear to closely match production from 2004, it is likely that soybean prices will be pressured enough to fall below the $5.00 level and to potentially fall to levels below loan rate levels prior to, or at harvest of 2005. If production, however, does fall from 2004 levels, the decline may be sufficient only to provide modest strength in price due to the large carryover supply situation in the U.S. and worldwide. It will take a much greater decline in production in 2005 than that experienced in 2003 to have a significant upward impact on prices in 2005 and into 2006. It is probable that if trend line yields occur in 2005, the current supply of soybeans will grow and will be sufficient to hold soybean prices from moving above the $4.80 to $5.25 range of early 2005.

It is important to evaluate production costs and to create a marketing plan in order to capture cost of production and profit. It will be important to evaluate forward pricing strategies that will lock in a floor price with a hedge, a cash forward contract, or with a put option. These strategies will protect against any price decline after the pricing strategy is employed.

In addition, if prices should rise, be sure to have a plan to take advantage of rising prices after a floor price has been locked in either through a futures hedge or a cash forward contract. This could be accomplished by purchasing at the money or out of the money call options. This type of strategy is often referred to as a synthetic put. Option premiums will likely be an issue that determines the purchase of at-the-money or out-of-the money options. With any of these strategies, it will still be important to know the county loan rate value for soybeans in the event that soybean prices fall so that any of the above-mentioned combinations do not establish a floor price for soybeans that is lower than loan rate.