Put Your 2003 Pre-Harvest Grain Marketing Plan in Place Now

By Edward Usset

“What are you thinking, mister?” you are probably saying to yourself, after reading the headline to this article.  “I’m concentrating on selling this year’s crop (In fact I know a few people who are still worried about last year’s crop), and you want me to worry about selling next year’s crop?”

The point is, you should have started thinking about selling your 2002 crop long before warming up the combine this harvest. Don’t make the same mistake with your 2003 crop.

Over the last six years, my efforts with the Center for Farm Financial Management and the University of Minnesota have centered on the difficult issue of grain marketing.  Responding to the message (some would say sermon) of “you need a plan,” I developed very specific pre-harvest marketing plans for two mythical farms that produce 84,000 bushels of corn, 23,000 bushels of beans, and 25,000 bushels of wheat each year.

I discuss these models in workshops with grain producers, not as an example of the perfect plan, but as a basis for discussion in the development of their own marketing plan. I continue to modify and improve my plans each year. Let’s discuss some of the key elements of my latest plans – my 2003 pre-harvest marketing plans for corn, soybeans and spring wheat.

The pre-harvest marketing plans for each crop look remarkably similar. That’s because the reasoning behind each plan is the same. Let’s examine my reasoning behind the plan while focusing on spring wheat in our examples.

I have a clearly stated objective: “Buy crop insurance to protect my production risk, and have 70% of my insured (APH) wheat crop priced by early June.” The objective is important as a simple statement of what it is I would like to accomplish before my crop is harvested.  Note too that crop insurance is an integral part of my plan. Production risks are very real and if I intend to be aggressive in my pre-harvest pricing, then I need to manage these risks. New types of insurance like Crop Revenue Coverage (CRC) and Revenue Assurance (RA) are powerful ways to manage production and revenue risks, and the cost to you is subsidized.  If you have not already used CRC or RA, take a real close look at these two programs in the off-season—well before the sales deadline next March, when your crop insurance decisions may be rushed.

The first footnote shows that the plan starts on September 1, 2002, but I am willing to make earlier sales at a price premium. This little note just came into play in mid-July, and we will return to discuss my first sale of 2003 spring wheat later.

My pre-harvest sales objective is divided into six equal sales of 2,500 bushels each. The initial –and minimum - pricing target is $3.10 cash price per bushel, or a futures price of $3.50 September wheat. This reveals my expectation about the local harvest basis, 40 cents under the September contract, a reasonable historic guess for much of the Red River Valley.

The rest of my pricing targets are stated as the cash price, as it should be, but I want to have the implied futures price in mind. Futures prices are important, but it is my local cash price that will determine my farm revenues. My pricing tool is left undefined (some form of forward contract) because it’s a tactical decision that depends on the basis. If your new crop basis bid is a good one, and you have no intention of storing the grain beyond harvest, you might opt for a simple forward contract. If the basis is poor and you don’t wish to deliver grain at harvest, selling futures or using a futures fixed contract will offer a better choice. Either way, you don’t have to make a final decision until the cash or futures price target is reached.

This $3.10 pricing target for spring wheat is more than just my initial starting point. It also represents the minimum pricing target for all of my pre-harvest sales. The second footnote of my plan says “Ignore decision dates and make no sale if prices are lower than $3.10 local cash price/$3.50 September futures.” What is so special about a $3.10 cash price as a minimum pricing objective?

The main reason is that I view the loan rate as a minimum pricing threshold, and $3.10 is very close to my newly revised local loan rate. To price new crop grain at less than your local loan rate exposes you to a different type of risk – the risk of getting a final price that is less than the loan rate should prices rally higher before harvest (like this year!). Loan rate is insult enough, so I am reluctant to take actions that could get me less than loan.

Once the minimum pricing target is achieved, all other pricing targets incorporate 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.

To illustrate how a decision date works, let’s assume that I’ve made my first sale at $3.10, but the market has not reached my second price target of $3.20. If March 18 arrives and my local new crop bid is $3.17 per bushel, what should I do? Sell!  I may not have reached my price target, but decision time is here and I am above my minimum pricing threshold of $3.10 per bushel.

The decision date compels me to act, and to continue marching forward towards my objective of 70% sold by the end of May. But what if March 18 comes and the new crop bid is $3.01 per bushel? Pass. No sale. Remember, I’m not interested in making sales at or below the loan rate.

Now that you understand how a decision date works, let’s turn our attention to a different issue. Why are all the decision dates clustered in the spring? A picture is worth a thousand words.

The 20-year average of December corn prices (see below) shows that futures prices tend to be higher in the March to May period than any other time of the year, and significantly higher than harvest prices. Decision dates are set in this period as a reminder to get something done during a period of proven opportunity. By the way, the patterns for November soybeans and September spring wheat are remarkably similar to corn, and decision dates in those plans are also clustered in the spring.

The final twist in my marketing plan is found in the final three sales, which give you the chance to personalize your plan when it says “consider options or a trend system.” Options are used several different ways to establish a minimum price for grain. If the new crop basis is attractive and you intend to deliver grain at harvest, the simplest way to establish a minimum price is to combine a forward contract with the purchase of a call. Another way to establish a minimum price is to simply buy a put. You can even work your way into an option “fence” strategy. In a fence, a put option is bought and a call option is sold to recover some of the premium. The higher the strike price of the call option, the less premium is recovered. You should also consider not buying options, and keeping the premium for yourself. The choice is yours!

For a different way to pursue the upside, some producers may prefer to use a trend following system as a disciplined way to change the plan. A trend following system is really a reference to technical price analysis - moving averages, channels and trendlines, support and resistance, oscillators, etc. It doesn’t always work, but it may work and it offers a disciplined way to change your plan.

I like to think of options and trend systems as trump cards that can be used to override a price target, and they are appealing. But options can be costly and technical tools are susceptible to sharp price declines. I suggest a very selective approach to their use in a marketing plan.

As you can see, my plans are straightforward. But no matter how hard I try to keep it simple, you will still find many details and tasks to track. That’s why you may wish to consider using Marketeer software. Developed by the Center for Farm Financial Management, Marketeer will not create a marketing plan for you, but it will make the task of writing and analyzing your plan easy. What if I sell futures or buy that call? How does my crop insurance selection affect the bottom line? Marketeer answers these questions and many more with a number of very readable tables and charts. You can even print out your plan and tape it to the refrigerator, so you won’t forget to use it. If you would like to learn more about MARKETEER, call CFFM at 1-800-234-1111 or check it out on the web at www.cffm.umn.edu/ .

There you have it – my 2003 pre-harvest marketing plans. It is particularly timely as the recent run-up in spring wheat prices brought that plan into play on July 16, 2002 when September ’03 futures closed at $3.67. I’ve made my first sale nine months before planting and 14 months prior to harvest! Will this be a good sale? If you define “good” as the highest price, I doubt it. In fact, I want my first sale to be a tale of regret – I still have 90% of my 2003 crop left to sell. Despite the difficult challenge of knowing when to price grain, I like to think that the reasoning behind my pre-harvest marketing plan is solid. I am confident that it can get me an above average price or, at the very least, it will help me avoid the type of mistakes that can turn a difficult year into a disaster. Do you feel the same way about your marketing plan?

Sample 2003 Pre-Harvest Marketing Plan for Corn

Objective: Buy crop insurance to protect my production risk, and have 70% 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 18, using some form of forward contract.

•  Price 10,000 bushels at $2.24, or by April 16, using some form of forward contract.

•  Price 10,000 bushels at $2.36, or by April 30, consider options or a trend system.

•  Price 10,000 bushels at $2.48, or by May 16, consider options or a trend system.

•  Price the last 10,000 bushels at $2.60, or by May 30, consider options or a trend system.

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.

Sample 2003 Pre-Harvest Marketing Plan for Soybeans

Objective: Buy crop insurance to protect my production risk, and have 70% of my insured (APH) soybean crop priced by early June.

• Price 2,500 bushels at $5.05 cash price ($5.55 Nov futures) using forward contract/futures hedge/ futures fixed contract.

• Price 2,500 bushels at $5.20, or by March 18, using some form of forward contract.

• Price 2,500 bushels at $5.35, or by April 2, using some form of forward contract.

• Price 2,500 bushels at $5.50, or by April 16, consider options or a trend system.

• Price 2,500 bushels at $5.65, or by April 30, consider options or a trend system.

• Price 2,500 bushels at $5.80, or by May 16, consider options or a trend system.

• Price my last 2,500 bushels at $5.95, or by May 30, consider options or a trend system.

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.

Sample 2003 Pre-Harvest Marketing Plan for Spring Wheat

Objective: Buy crop insurance to protect my production risk, and have 70% of my insured (APH) wheat crop priced by early June.

• Price 2,500 bushels at $3.10 cash price ($3.50 Sept wheat) using forward contract/futures hedge/futures fixed contract.

• Price 2,500 bushels at $3.20, or by March 18, using some form of forward contract.

• Price 2,500 bushels at $3.30, or by April 16, using some form of forward contract.

•Price 2,500 bushels at $3.40, or by April 30, consider options or a trend system.

• Price 2,500 bushels at $3.50, or by May 16, consider options or a trend system.

• Price 2,500 bushels at $3.60, or by May 30, consider options or a trend system.

• Plan starts on September 1, 2002. 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.

Usset serves as a grain marketing specialist for the Center for Farm Financial Management, and teaches grain marketing courses at the University of Minnesota. Usset has a website on grain marketing at www.apec.umn.edu/faculty/eusset .  He can be contacted by e-mail at usset001@umn.edu