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Get Yourself a Grain Marketing Map Establish a pre-harvest marketing plan for 2006, and include sales of unsold 2005 grain as price objectives or time deadlines are triggered under your 2006 plan By Tracy Sayler It’s unlikely you’d head out on a cross-country trip without a road map – heck, a map’s often needed even close to home when traveling unfamiliar roads. Along the way, you might alter the course and take a different road than what was originally planned, but the map still helps to ultimately get from point A to point B. A marketing plan does the same thing. It helps gives you direction for selling grain, recognizing that pricing strategies may change along the way, and often do. “No marketing plan is perfect. We can debate decision dates and prices, it’s the broader idea of being proactive that makes having a plan worthwhile,” says Ed Usset, grain marketing specialist for the Center for Farm Financial Management at the University of Minnesota. As part of his grain market education efforts, Usset drafts marketing plans for wheat, corn and soybeans to help guide crop producers in making their own selling decisions. In his marketing plans, Usset outlines and executes specific pre-harvest and post-harvest marketing plans for a hypothetical farm, which in 2005 will hypothetically produce 85,000 bushels of corn, 23,000 bushels of soybeans, and 25,000 bushels of wheat. Crop insurance is a cornerstone of Usset’s marketing plan for each crop, with a goal of having 75% of the APH-insured crops priced by late May for corn and early June for wheat and soybeans. Usset’s marketing plans establish 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 pricing target is essentially a minimum sales floor, slightly above loan for each crop. For wheat, as an example, the first sales objective is $3.25 cash/$3.60 Sept Mpls wheat futures. No sale is made below this amount, and decision dates for selling are ignored if prices are below the $3.25/$3.60f threshold. 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 25”). 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. Growers can use whatever decision dates they wish, but the important thing is to follow them because more often than not, grain prices trend lower in the summer into harvest, and you don’t want to be forced into selling grain at seasonal lows to make bin space for new grain. That might be one reason why USDA statistics indicate that farmers sell two-thirds of their crop in the bottom one-third of the crop’s annual price range. Usset refers to options or a trend system (moving average, key chart points, stochastics, etc.) to use as pricing tools to consider under his pre-harvesting marketing plans. But these type of strategies are optional. Any producer can customize according to their own risk-taking desires and capabilities. When the time comes to price a 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 may simply forward price the grain. The choice is yours, but do take some sort of action when a price objective or time deadline for sales is reached. Following is the pre-harvest marketing plan that Usset established last fall for this year’s wheat crop. His 2005 pre-harvest marketing plans for corn and soybeans can be found online at www.cffm.umn.edu/publications/mktplans.aspx. Ed Usset’s 2005 Pre-Harvest Spring Wheat Marketing Plan Expected 2005 production: 25,000 bushels (640 acres @ 38 bushels per) Objective: Buy crop insurance to protect my production risk, and have 75% of my APH insured wheat crop priced by early June.
Plan starts on September 1, 2004. I will consider the December futures contract for new crop sales at a 10-cent premium to September. I will ignore decision dates and make no sale if prices are lower than $3.25 local cash price/$3.60 September futures. Execution of Usset’s ‘05 Pre-Harvest Marketing Plan In his hypothetical plan established last September, Usset makes only three sales, on September 1, 2004, the day he set the plan; and on June 20 and July 18 of 2005 (he held the wheat past his time deadlines for sales, because the price did not meet his minimum goal of $3.25 cash/$3.60 Sept Mpls wheat futures). In the following “play-by-play” narratives, Usset describes his wheat sales actions. Sept. 1, 2004: My marketing plan is written for the 2005 wheat crop. September 2005 spring wheat futures close at $3.90½. I will use hedge-to-arrive contracts to price 7,500 bushels, representing 30% of my expected 2005 production and completing the first three steps in my plan. Using futures fixed contracts will keep my delivery options open in the harvest of 2005. This will establish a new crop 2005 cash wheat price of about $3.55, assuming a harvest basis of 35 under September futures. June 20, 2005: An early summer rally pushes prices back over my minimum pricing objective of $3.60 per bushel. I will use hedge-to-arrive contracts to price 5,000 bushels (steps 4 & 5 of my pre- harvest plan) at $3.61½, representing an additional 20% of my expected 2005 production. July 18, 2005: The uptrend was broken in late June when the market dropped sharply. It also dropped below my minimum pricing objectives. With tonight’s close back above my $3.60 minimum, I choose to price my remaining bushels. I like the 11½ cent carry to the December contract so I will price these bushels using HTA contracts at $3.73¼ per bushel in the December contract. Thus, as of mid-July, Usset had completed his 2005 pre-harvest marketing of spring wheat with an average September futures price of $3.74, or a cash price of $3.35-3.40 per bushel. Not an impressive price, mind you, but about as well as could be managed, keeping in mind that the USDA July estimated average U.S. farm price for the 2005-06 marketing year is $2.60–3.10. Following are Usset’s pre-harvest marketing plans for 2006. In fact, he’s already made several ’06 new crop soybean sales. Use these plans as a guide for your own grain sales planning for selling ’05 grain and making ’06 new crop sales. Again, Usset stresses that his plans are not absolute. Tailor the crop insurance coverage, price objectives, time deadlines, bushel amounts and pricing strategies to your own liking. The important thing is to have that map in hand to help determine what marketing paths you wish to take. Ed Usset’s 2006 Pre-Harvest Wheat Marketing Plan Expected 2006 production: 25,000 bushels (640 acres @ 38 bushels per) Objective: Buy crop insurance to protect my production risk, and have 75% of my APH insured wheat crop priced by early June.
Plan starts on September 1, 2005. Earlier sales will be made at a 20-cent premium to price targets noted above. I will consider the December futures contract for new crop sales at a 10-cent premium to September. Ignore decision dates and make no sale if prices are lower than $3.25 local cash price/$3.60 September futures. Ed Usset’s 2006 Pre-Harvest Corn Marketing Plan Expected 2006 production: 85,000 bushels (600 acres @ 142 bushels per) Objective: Buy crop insurance to protect my production risk, and have 75% of my anticipated corn crop (based on APH) priced by late May.
Plan starts on November 1, 2005. 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 $2.10 local cash price/$2.50 December futures. Exit all options positions by mid-September. Ed Usset’s 2006 Pre-Harvest Soybean Marketing Plan Expected 2006 production: 23,000 bushels (530 acres @ 43 bushels per) Objective: Buy crop insurance to protect my production risk, and have 75% of my anticipated soybean crop priced by early June.
Plan starts on October 1, 2005. Earlier sales will be made at a 25 cent premium to price targets noted above. Ignore decision dates and make no sale if prices are lower than $5.15 local cash price/$5.65 November futures. Exit all options positions by mid-September. Execution of the ‘06 Pre- Harvest Soybean Marketing Plan April 15, 2005: It’s early to be thinking about 2006, but November 2006 at $5.92½ futures are trading 25 cents over my minimum pricing objective. I had a similar chance last year but, much to my regret, I never got around to getting my plan published and taking early action (and I vowed that wouldn’t happen again). A sale of Nov ’06 at $5.92½ roughly translates to $5.50 per bushel at the farm. I should be so lucky as to have this early and small (~ 10% of my crop) sale be my worst. June 21, 2005: I’m using discretion on these early sales. Based on price alone, I could have made these sales earlier, but the price trend continues to move higher. I will make two sales for the ‘06 crop year, with HTA sales of Nov ’06 at $6.45 per bushel. I am now 30% sold on the ’06 soybean crop, and I doubt that I will be willing to make any further sales until early next year. A full 15 months prior to harvest, I am 30% sold on my 2006 crop at an average November futures price of $6.27½, or a cash price of $5.80- 5.90 per bushel. No more pre- harvest sales of the ’06 are planned before the ’05 harvest. Ed Usset is a Grain Marketing Specialist at the Center for Farm Financial Management, University of Minnesota. He can be reached by calling 612-625-1964, ext 37 or by e-mail at . Web site: www.cffm.umn.edu/publications/grain.aspx. |
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