Get to know your marketing tools

We finished harvesting on our farm in southeast Nebraska last Wednesday. Yields were average for irrigated corn and soybeans, which was expected. However, we were pleased that dryland corn matched last year’s record production and dryland soybeans were 20% higher than the last 10-year average. Reports indicate these results (i.e. corn meeting expectations and bean yields higher than expected) are being seen across the Midwest. I expect the USDA yield estimate will be close to final numbers in the January report.

Since the much-anticipated Oct USDA production reports, end users are scaling down buyers from $3.75 Dec futures, but farmers aren’t selling at those levels, waiting for $4. I expect a tight trading range for the next few months.

There was a nice bump in the soybean market after the October report, causing some farmers to sell. Keep in mind, with the higher than expected yields, $9.25 futures produce the same gross revenue as $10 futures with lower yields. Unless there is a production issue in South America, $9.50 will be difficult.

Market action

Corn

On 10/6/15 I sold 5% of my 2016 corn production at $4.18 Dec futures. This is above my breakeven point, and may be considered a good sale if 2016 is another good growing year. I hope this is my worst sale of the year. I’ve sold about 33% of 2016 so far.

Soybeans

My 2015 soybean position was hedged in the November futures. Since those futures expire next month, I need to move them further into the future. On 10/6/15, I bought my previously sold futures position back, and then immediately sold the July futures for a 16-cent profit, which is market carry. This is how I get guaranteed profit to store grain on the farm.

This carry is less than last year (which was 30 cents). The reason for the lower market carry — fewer farmers are selling grain at harvest. Instead many are holding hoping for higher prices. Therefore, the market is reducing the carry, hoping to entice bushels out of storage (hence the lower market carry amount this year).

I also expect basis to improve sometime after the New Year for my 2015 crop we just put into on-farm storage, which should also increase my profits. In the western Corn Belt, basis has dropped 20 cents in the last 10 days, due to farmers short on space taking beans to town. I expect basis to increase after harvest is over.

What is in your tool box?

I’m amazed how many farmers are still reluctant to use futures in their grain marketing. Not using futures is like going to the field with only a hammer, screwdriver, vice grip and crescent wrench in the tool box. Can you fix a problem in the field with these tools? Yes, but how effective are you and how successful will you ultimately be?

The Hammer

It’s easy to understand what will happen when you use it. But, it doesn’t give you very many choices. Hit something just right, and all the problems are solved. But, swing too hard or in the wrong spot, and you can break something. The hammer is the equivalent of selling cash grain. Every farmer knows how this will work. They have had successes and failures in the past, but it’s pretty easy and takes little skill. Selling at the right price at the right time (a direct hit) feels great. But, selling at the wrong price or time is hard to fix and causes frustration.

The Screwdriver

The screwdriver is an easy tool to use, but very limited in function. It can be very useful in the right situation, but unless you have the right screw or bolt, this tool may not be the answer. This is similar to just counting on insurance revenue programs or government payments to help set a floor price or make up for any short fall in prices. It’s an indispensable tool, you can’t live without it, and easy to use, but it won’t fix everything.

The Crescent Wrench

When you aren’t sure what size of bolt you need to loosen (or maybe you have a surprise metric bolt you have never encountered) the crescent can come in very handy. However, if the bolt is really tight you can round off the corners of the bolt or nut, and be in an even worse position. This is similar to buying a put or call option. There are times buying a put or call can be just the right “tool” in the marketing world. However, there are situations where it doesn’t work as well, or makes a problem worse than when you started. In less volatile markets like this previous year, options can cost farmers more than they can potentially gain from them.

The Vice Grip

The vice grip is a companion tool with any of the above tools mentioned. You can keep your fingers safe using a vice grip to hold a nail when using a hammer. Or a vice grip can work with a screwdriver or crescent wrench to hold a nut in place when screwing in a bolt head. This is like selling grain to an end user. It can be handy on its own, or use it with other tools, like Hedge to arrive, minimum priced contracts, or deferred pricing. However, it can lock you in tight, leaving you with limited options. What if there are production issues? What if there is another end user paying more in the future? Flexibility is limited sometimes.

What’s in my tool box?

Obviously, I have the above tools in my tool box, but I also have other tools available to me that best fits each situation the grain market throws at me.

Socket Set

I have a complete standard and metric socket set that fits any bolt in need of repair. I want all sizes and extensions available for the right task. Futures (like sockets) give me flexibility and allow me to pick the exact price I want to sell grain. Deep sockets are like using deferred contracts that allow me to sell late in the year and pick up market carry. Different drives are like futures contracts that allow me to pick the right year to market. All the extensions are equivalent to how futures allow me to take advantage of basis opportunities. While a little heavier to carry, keep organized and more complicated to use, the flexibility of what I can do and how much I can fix is worth it.

WD40

Sometimes a little extra help is needed to loosen tight bolts. This is like selling calls. Does it work all the time? No, but when things are tight and none of the other tools are working, sometimes a little help is all that’s needed to get the job done.

Next time you knock a sickle out while cutting beans, or have to fix a broken gathering chain on the corn head, ask yourself what tool will do the best job and what do you have in your tool box.

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.

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