Price averages and grain marketing strategies

By Jon Scheve, Superior Feed Ingredients, LLC

The market will be closely watching South America’s weather for the next 45 days. While there is weather premium currently in place, widespread dryness throughout the Southern Hemisphere will need to continue for corn to trade above $4.50 and beans above $12.

Grain marketing is challenging because everyone wants to sell at the top of the market; but no one knows when that will be. Some farmers hold on the entire year, waiting for a huge rally. However, many farmers sell incrementally during rallies to reduce risk, while leaving some crop available to sell if the market rallies further.

My grain marketing plan

Last week I discussed how my grain marketing plan priced me out early on corn, but left upside potential open on beans. This strategy allowed me to hit my summer goals of $4 corn and $10 beans even though when I set those goals prices looked unattainable. I am currently 90% sold on corn at $3.80 and 50% sold on beans at $10.95. When factoring I raise 5 times more corn than beans, I am basically meeting my goals for the year if I sold my remaining beans today.

How does this compare to other risk management strategies?

Most farmers know that a harvest rally is rare, so some sold incrementally leading into harvest. After talking to farmers and elevator managers around the U.S., the following summarizes the most common sales points I heard farmers were making:

  • 20% of production sold at $3.50. Many feared the market would pull back to $3 to $3.20 as harvest progressed so they made their first sales at this point as the market began to rally.
  • 20% of production sold at $3.75. Many were shocked by the strong market rally into harvest and thought it was too good to be true.
  • 20% of production sold at $4. That’s generally every farmer’s sale goal.
  • 20% of production sold at $4.20. This was a $1 per bushel rally from the market bottom, so many farmers made this sale in case the market topped out soon.

This means farmers who were managing their risk are likely 80% sold with an average price of $3.86.

What about beans?

Beans were a concern too, and some farmers started early. Following summarizes the bean sales I am hearing were made by farmers:

  • 20% of production sold around $9.25. Many feared a return to sub-$9 was a real possibility.
  • 20% of production sold around $9.75. This is most farmers’ breakeven point, and likely 50 cents better than their last sale.
  • 20% of production sold at $10. This was many farmer’s sales goals all summer.
  • 20% of production sold at $10.25. Many were concerned there was no more upside potential.

This means farmers who were managing their risk are likely 80% sold with an average price of $9.81.

What will farmers do with the last unsold 20%?

If these farmers sell the last 20% of corn for $4.50, their final average price will be $3.99. If they sell their last 20% of beans for $12, their average will increase to $10.24.

If these same farmers hold out for $5 corn, their average only increases to $4.09. If they hold out for $14 beans, the average only increases to $10.65.

What would my final average be if I sold my remaining crop?

Selling my final 10% of corn for $4.50 would increase my average to $3.87 verses my current $3.80 position. Selling my last 50% of beans at $12 would increase my average to $11.47 verses my current $10.95 position.

How does this compare to the other farmers’ average prices?

My average bean price would be around $1.23 higher ($10.24 versus $11.47). If we divide $1.23 by my 5:1 corn to beans crop ratio, I could add 24 cents to my $3.87 corn price. That comparative price would give me a $4.11 corn average and $10.24 for beans.

If I held out for $5 corn and $14 beans, my averages increase to $3.91 and $12.47. With the 5:1 corn to bean ratio and shifting bean profit to corn, I’d have $10.65 for my beans, and $4.33 for my corn.

What does this mean?

This illustrates that most prudent risk management strategies typically have similar final positions. Generally, final average values are heavily influenced by the first two sales (or around 33% to 40% of total sales). After 40% is sold, final price position movement can be relatively limited.

Often farmers get caught up waiting to sell their final bushels at the top. However, even if they manage to guess the top, their yearly price average won’t end up changing much. And more likely, they will be waiting for a rally that may never come, or worse missing the top and selling the last bit near the lows. That’s why having price goals and a plan to achieve them generally works better.

Keeping perspective: Don’t worry about coffee shop talk

While prudent risk management strategies tend to work over time, we still all know those farmers who waited to sell and are now bragging about the $12 beans and $4.20 corn they sold.

Many elevator managers have confirmed that these farmers sold a little of their production at these values. However, when asked how these same farmers did the past few years, they all say these farmers usually sell at lower values over time. Usually, it’s around 20 cents less on a rolling 3-year average. This makes sense, because having a strategy that waits for the high have failed in the last 8 years.

It is important to remember that long-shot bets pay off occasionally. However, prudent risk management will be the winning strategy 70% to 80% of the time. It is hard to remember this when the market is so hot right now, but the market cannot realistically sustain this kind of momentum forever.

Please email with any questions or to learn more. 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.

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