Get Ahead Of The Market Game For Next Year

Establish a pre-harvest marketing plan for 2004

By Tracy Sayler

The bad news if you don’t have a marketing plan for your 2003 crop (or had one, but didn’t use it) is that you should’ve had most of your grain priced and sold already. The good news is that you can be ahead of the game for next year by establishing a pre-harvest marketing plan for 2004, and include sales of 2003 grain as price objectives or time deadlines are triggered under your 2004 plan. 

Following are pre-harvest grain marketing plans to consider for 2004, courtesy of Ed Usset, grain marketing specialist for the Center for Farm Financial Management at the University of Minnesota, www.cffm.umn.edu .

 Usset conducts marketing workshops across the Upper Midwest, and has used his marketing plans to help guide hundreds of crop producers in making their own selling decisions.  In his marketing plans, Usset outlines and executes specific pre-harvest marketing plans for a hypothetical farm, which in 2004 will produce 65,000 bushels of corn, 17,500 bushels of soybeans, and 20,000 bushels of wheat each year. “It is not an example of a perfect plan, but is useful as a basis for discussion with producers in the development of their own marketing plans,” he says.

Crop insurance is a cornerstone of Usset’s marketing plan for each crop. In his plans for 2004, he boosts the level of crop insurance coverage from 70% to 75%, which he says is more line with the current coverage levels being taken by purchasers of crop revenue insurance products (CRC, RA).  In other changes from his plans from 2003, Usset added several early decision dates to his soybean plan, and consolidated his wheat plan to fewer but larger sales. 

The pre-harvest marketing plan Usset has in place establishes pre-harvest sales objectives divided into allotted bushel amounts (You can set your own sales installments at the bushel amount of your choosing). The initial and minimum pricing target is slightly above loan for each crop. For wheat, as an example, the first sales objective is $3.10 cash price per bushel, or a futures price of $3.50 September wheat. 

Usset says farmers should understandably be reluctant to price new crop grain under the loan rate. That’s why he sets the minimum pricing objective for his first wheat, corn, and soybean sales higher than the current loan rate.

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 the historic seasonal trend for futures prices tends to be higher than any other time of the year. Decision dates are set in this period of March to early June as a reminder to get sales made during a period of proven opportunity.  Some growers match these sales dates with USDA supply/demand or other reports.

Usset refers to the consideration of options or trend system to use as pricing tools to consider under his pre-harvesting marketing plans.  The possibility of using options or a trend system in pricing (moving average, key chart points, stochastics, etc.) serves to customize the plan for each individual producer according to their risk taking desires and capabilities. When the time comes to price this portion of their grain, one producer may opt to follow a price trend higher, another producer may choose to buy a put, while still another is pleased to simply forward price the grain that day.

How the plan works can be demonstrated by reviewing Usset’s pre-harvest wheat marketing plan for 2003, of which the first sale was actually made way back on July 15, 2002, when Minneapolis Sept ’03 futures closed at $3.67. The early sale achieved his objective of a 15-cent premium above his initial Sept. futures price target of $3.50. Usset’s first sale for 2003 was two cents below the close, at $3.65, using a hedge-to-arrive (futures fixed) contract, nine months before planting and 14 months before the 2003 harvest.

A hedge-to-arrive (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 last August, three last September, and one last 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.

Usset has already made his first sale of 2004 spring wheat. In July, 02, the Sep'04 contract was already trading and closed during the month above $3.65, his minimum price for early sales.  He sold 5,000 bushels of new crop 04 wheat at $3.66 (the close) using an HTA.

Use these plans as a guide for your own grain sales planning, but again, Usset stresses that his plans are not absolute.  Tailor the crop insurance coverage, price objectives, time deadlines, bushel amounts and pricing tools to your own liking.  The important thing is to get a plan in place.

Contact Usset by email, usset001@umn. edu , or visit his web site, www.apec.umn. edufaculty/eusset/mkgplans.html

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 some form of fixed price contract: forward contract, HTA, sell futures.

• Price 2,500 bushels at $5.20, or by Jan 7, using a fixed price contract.

• Price 2,500 bushels at $5.35, or by Feb 6, using a fixed price contract.

• Price 2,500 bushels at $5.50, or by Mar 6, using a fixed price contract.

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

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

• Price 2,500 bushels at $5.95, or by Jun 3, consider options/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 some form of fixed price contract: forward contract, HTA, sell futures (Completed in July, 2003. Sold at $3.66 using an HTA).

• Price 5,000 bushels at $3.30, or by Apr 5, using a fixed price contract.

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

• Price 5,000 bushels at $3.70, or by Jun 3, consider options or 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.

Use Seasonal Price Patterns for Sales Targets

Seasonal price patterns are good general time periods to make grain sales, as shown in the 15- year Dec futures seasonal chart here.  Decision or default dates for selling can be added into the time period of seasonal price patterns, as indicated in the Dec 03 Mpls chart. It’s important to have a plan, and decision dates help turn your plan into action.  Sell if the futures or cash market reaches a pre-determined minimum price target, or at your default decision dates.  The decision dates we like to use at Country Hedging correspond with price seasonality and USDA crop report release dates. The three circles in the Minneapolis December futures chart represent the October 10, January 10, and May 12 of 2003 crop reports. As you can see, these were good spots to make sales, even if your original price target was not achieved. Consult with a grain marketing professional for developing a grain marketing plan with selling objectives that are tailored to your farming operation.

—Tom Willander, Country Hedging, twilland@countryhedging.com.

December Minneapolis Wheat Futures  15 Year Seasonal