Selling Two Crops

Planning sales for remaining old crop from 2005, and new crop production expected in 2006

Welcome to another year, and assuming you plan on running the drill/planter again next spring, welcome to another new crop to market.

This means you need to be thinking of selling two crops, if you haven’t begun to already: remaining old crop from 2005, and new crop production expected in 2006. 

But what if I have prevented plant? What if something happens and I end up not producing a crop? That’s your inner voice trying to tell you to put off marketing decisions – don’t listen to it.  Look back at your production history; chances are, if you put in a crop, you ended up with bushels to harvest, though how much is understandably variable from year to year. So assume an average (three years, five years, seven years, county average, whatever you think is reasonable) and start planning from there.

Ed Usset, grain marketing specialist for the University of Minnesota Center for Farm Financial Management, formulates model marketing plans and simulated sales for corn, wheat and soybeans.  His pre-harvest plans for 2006 can be found online at www.cffm.umn.edu/publications/mktplans.aspx . Usset also emails periodic updates on marketing plan sales. Email him at usset001@umn.edu to be put on the list.

How should you adapt your pre-harvest marketing plans to adjust for production costs that will clearly be higher in 2006? Usset lamented that same key question in formulating his ’06 grain pricing objectives this past fall. For example, CFFM preliminarily estimates an increased production cost of about 30 cents per bushel for corn.

“Based on this work, you might think I should simply raise my pricing targets 30 cents per bushel from last year’s plans. I wish life (and grain marketing) were that easy. Production costs are clearly increasing, but market prices remain low – just because I need 30 more cents does not mean the market will give it to me.  Supply and demand still rule.”

He left new crop pricing and minimum selling price objectives unchanged for now. “My risk in leaving price objectives unchanged is that a year from now, I may find I made some early and ‘too cheap’ sales in the face of higher production costs. But, if I raise my price objectives too high, I run the risk of making no pre-harvest sales, and ultimately making sales next harvest that may be even worse than ‘too cheap.’ I guess you could conclude that I would rather too early make a few sales at lower prices, than to take no pre-harvest actions at all.”

While Usset initially left his pricing objectives to begin ’06 sales unchanged from ’05, he intends to revisit his minimum pricing objectives (starting at $2.50 Dec corn futures/$2.10 cash; $3.60 Sept spring wheat futures/$3.25 cash; $5.65 Nov soybean futures/$5.15 cash) this winter, before decision dates for making sales are reached. “If the higher cost environment we see today persists, I leave the door open to increasing my minimum price objectives before my decision dates start.”

Usset’s pre-harvest marketing plans incorporate decision dates for pricing a portion of expected new crop (ie, price 2,500 bushels at $3.40c/$3.75f, or by March 15, pricing tool to be determined).  If pricing objectives aren’t met, but are higher than your loan-based minimum threshold, then sell by these decision dates. Usset has his decision dates clustered in the spring, when the historic seasonal trend for futures prices tends to be higher than any other time of the year.

Global wheat production will be high, the second largest crop in history, with larger stocks held in exporter countries and strong export competition.  A subdued outlook for wheat exports into next spring means growers should temper expectations for significant market rallies that would justify wheat storage into next spring.  USDA weekly export performance indicator online: www.fas.usda.gov/export-sales/weekpi.htm.

Selling ’05, pricing ’06
In planning new crop and remaining old crop sales, listen to what the market is telling you, particularly when it comes to the market “carry,” the difference in price between nearby futures and faraway months. It helps in deciding whether storage is worthwhile. At Thanksgiving, the carry was little to no carry in wheat ($3.65 Dec Mpls, $3.65 Mar, $3.59 July) while there was a substantial carry in corn ($1 .89 Dec Chi, $2.02 Mar, $2.19 July) pointing to little incentive for storing wheat, good incentive for storing corn.

North Dakota State University extension crops economist George Flaskerud advises growers to take advantage of any price rallies yet before the new year to make old crop sales. “If there’s a rally, basis or futures, and prices get within 10 to 15 cents of October highs, I’d let it go.” Flaskerud says prices at current levels shouldn’t collapse, but may not recover much to justify storage into next spring. Use the loan, however, and target April-May for cash sales of low quality wheat.

Any decline in ’06 wheat acres would likely benefit new crop wheat prices more than the old crop wheat price, which will be more dependent upon export activity.  Flaskerud says the 10-year seasonal pattern (1995-2004) is for spring wheat exports to peak in September, bottom out January through February and then peak again in May, with the May peak 8% lower than the September peak. The peak last year was in June, and was considerably higher (30%) than the 10-year average May peak.

He says the pattern of spring wheat exports during the balance of this marketing year could look more like the 10-year average than the 2004-through-2005 pattern. This would mean that exports could diminish in January through February and then modestly rise into May. Exports may be weaker in part because Canada could be more competitive.

Look to initiate or scale-up new crop wheat sales around Mpls ‘06 Dec $4.00- $4.40, with emphasis around $4.20. Similar to last year, consider using a combination of crop insurance, elevator contracts, put options and “courage calls” (out-of-the-money call options, at Mpl Sep $4.10 for 5 cents or less). Limit new crop contracts to CRC/RA-HO guaranteed yield.

Consider storing ’05 corn, selling the balance when futures hit around ‘06 Jul $2.37- $2.47, with sales complete by July 1. When selling, evaluate returns to storage for use of storage hedge using a hedge or HTA contract in July ‘06 futures with delivery planned for June. Scale-up new crop sales over Dec $2.65- $2.95 futures , using a combination of crop insurance, elevator contracts and put options, limiting contracts to CRC/RA-HO guaranteed yield.

Flaskerud says storage of soybeans into January-February may be profitable; watch South American soybean crop development. A sales target to consider for both old and new crop soybean sales is Nov $6.25-$7.00, with emphasis around $6.50. Again, consider a combination of crop insurance, elevator contracts and put options, limiting new crop contracts to CRC/RA-HO guaranteed yield.