Selling forward with a production budget in mind

Where will corn and bean prices go?

Corn has a big technical resistance at $3.77 (100-day moving average). So far, the market has held this price as a floor. Some still estimate $4.25 as an upside target. Fundamentally, farmers haven’t been sellers much below $4, so with the board around $3.85 some end users can’t source corn without increasing basis. This could indicate a sideways trade the next few weeks with a $3.80 to $4.10 range on March corn futures.

Soybean prices continue to be susceptible to South American weather reports and China cancellations, which are both bearish prices right now. I still estimate beans are in a downward trend for a few weeks, if not longer.

The benefits of selling forward

Again this week a farmer told me that he doesn’t like to sell forward. His reason — it’s difficult to plan all of his future input costs right now.

Honestly, I was a little surprised by this. I think farmers can estimate their inputs not only for the coming year, but for the next three years. On our farm, we look at the costs from the last three years to do estimates. Over the years, we have found costs are fairly steady or increase at consistent rates.

As an example, following are examples and trends from our farm.

Machinery costs are based on per hour or per acre costs for everything. In other words, we analyze all of our machinery leases or purchase prices down to how much it costs to operate each tractor, planter, combine, etc. per acre or hour. Not only do we do this to help make purchase decisions, but analyzed historically (at least on our farm), this expense is flat or needs to be adjusted slightly on a three-year plan.

Seed and chemical costs on average increase 3% to 5% on our farm each year. Typically for corn I estimate seed costs at $70 per acre and chemicals are another $50 per acre. So, with a 5% increase estimate per year, it means a $6 per acre cost increase. To put that into perspective, assuming a 166-bushel acre yield, it is less than 4 cents per bushel per year cost increase.

Fertilizer is a huge concern for most farmers. On our farm we use anhydrous ammonia. It costs about $65 to $70 per acre to apply on average. For every $100 per ton change in fertilizer prices, it shifts the price about $11 per acre. So again, assuming a 166-yield, this would mean a 6-cent per bushel cost swing. Also, we apply some starter fertilizer, which fluctuates. My estimates show that it only changes by 3 cents per for each $100 per ton move. Discussing costs with clients and other farmers throughout the Midwest, these price fluctuations are similar even using different types of fertilizer.

For this reason, I avoid selling corn when buying fertilizer. Fertilizer is a commodity with its own cyclical market that doesn’t necessarily match corn prices. The entire move up or down in my fertilizer costs nearly matches the daily limit in the corn market.

Fuel is another commodity that changes yearly. However, it is a relatively low percentage of overall operation costs. Accounting for a 50-cent change in fuel prices equates to a 2.5-cent per bushel change in production costs.

 

Based upon these estimates, following are the ranges on my corn budget per bushel:

• Machinery costs won’t like change for the next year or two

• Seed and chemicals will likely increase 4 cents to 8 cents per bushel

• Fertilizer could have a range of -10 cents to more than 20 cents per bushel

• Fuel could have a range of -$10 cents to +10 cents per bushel.

 

The input cost total range could be 54 cents — (-16-cent to 38-cent change in price).
Dec 2015 corn futures range to date has been $1.50 — ($3.64 to $5.04). With a budget that has a potential range of about 50 cents, and a market that has the potential to move $1.50, I think it’s clear why it’s better to plan ahead.

Every farmer knows what their past expenses have been, so I recommend to my clients that we plug in a three-year moving average and try to come in at “budget” (or under) on each line item (if possible). Sometimes it may be up on one line item, but usually they are under somewhere else. Typically, in the end the overall the bottom line is close.

Most businesses do this same type of planning, so I’m surprised when farmers aren’t doing this. If farmers want to reduce market risk on their farm operation, they need to be doing this too.

Jon grew up raising corn and soybeans on a farm near Beatrice, NE.  Upon graduation from The University of Nebraska in Lincoln, he became a grain merchandiser and has been trading corn, soybeans and other grains for the last 18 years, building relationships with end-users in the process.  After successfully marketing his father’s grain and getting his MBA, 10 years ago he started helping farmer clients market their grain based upon his principals of farmer education, reducing risk, understanding storage potential and using basis strategy to maximize individual farm operation profits.  A big believer in farmer education of futures trading, Jon writes a weekly commentary to farmers interested in learning more and growing their farm operations.

 Trading of futures, options, swaps and other derivatives is risky and is not suitable for all persons.  All of these investment products are leveraged, and you can lose more than your initial deposit.  Each investment product is offered only to and from jurisdictions where solicitation and sale are lawful, and in accordance with applicable laws and regulations in such jurisdiction.  The information provided here should not be relied upon as a substitute for independent research before making your investment decisions.  Superior Feed Ingredients, LLC is merely providing this information for your general information and the information does not take into account any particular individual’s investment objectives, financial situation, or needs.  All investors should obtain advice based on their unique situation before making any investment decision.  The contents of this communication and any attachments are for informational purposes only and under no circumstances should they be construed as an offer to buy or sell, or a solicitation to buy or sell any future, option, swap or other derivative.  The sources for the information and any opinions in this communication are believed to be reliable, but Superior Feed Ingredients, LLC does not warrant or guarantee the accuracy of such information or opinions.  Superior Feed Ingredients, LLC and its principals and employees may take positions different from any positions described in this communication. Past results are not necessarily indicative of future results. He can be contacted at jon@superiorfeed.com.

Check Also

OSU Extension releases new crop staging videos

By Alexander Lindsey and Amanda Douridas, Ohio State University Extension A new suite of crop staging …

Leave a Reply

Your email address will not be published. Required fields are marked *