Three Predominant Marketing Strategies Likely with New Farm Bill

By Steven Johnson

1) Renewed interest in the Marketing Loan Program vs. just taking the LDP and not selling or pricing the crop.
The 2002 county loan rates for corn were increased by 12 cents per bushel, while soybean county loan rates declined by 26 cents.  This means the likelihood this fall of larger corn LDPs, but smaller soybean LDPs, if the price patterns of the last four harvests continue. A rebound in prices over the past few years, however modest, would generally result in smaller LDPs.  Thus, I would expect more producers and landowners to use the Marketing Loan to generate cash and to manage price risk as opposed to the “LDP and store” strategy of the past.

2) Expanded use of minimum price contracts for both old crop and new crop bushels.
The market loss and oilseed payments received each of the last three years has been replaced with a new Counter-Cyclical Payment (CCP). The potential CCP will be calculated each fall by taking the target price minus (higher of loan rate or national average market price) minus the direct payment rate. For the next two years, the maximum CCP will be 34 cents per bushel for corn and 36 cents per bushel for soybeans. You can collect up to 35% of the potential CCP after October 1st, up to 70% in February and the balance the next September.

If you forward price bushels too early and the price continues higher, then you don’t receive the highest price, plus if the price goes high enough, you might not receive the CCP. Thus, minimum price strategies (replacing sales with call options, the use of floored average contracts, etc.) will become more popular as a means to price cash bushels, yet still benefit from higher prices. In addition, new strategies to protect the CCP will become a part of crop marketing.

3) Improved knowledge of crop insurance as a risk management tool.
With the level of federal expenditures in this bill, it’s doubtful that federal disaster payments for crop losses will be as common as they have been in the past. Producers and landowners alike will be expected to utilize crop insurance to manage their own yield losses.

In addition, the use of revenue tools (Crop Revenue Coverage and Revenue Assurance) has increased dramatically since they first became available. Expect their acceptance to expand. The use of these revenue tools is especially critical in corn production, where both yield and price risk is greater most years, and the new crop pricing opportunities above the county loan rate is common. The seasonal price trends for new crop corn in recent years favors pricing much earlier than has been the trend in the past. Revenue tools can help make the decision to forward price new crop bushels much easier.

Johnson is an Iowa State University extension field ag economist,
Ph: (515) 261-4215,  E-mail: sdjohns@iastate.edu ,
Website: http://isufarmeconomyteam.org .