Johnson: Stop outlooking, start planning
By KRISS NELSON
AMES – “Surviving and Thriving in Challenging Times” was the theme for a grain marketing forum for women March 24 on the Iowa State University campus in Ames.
The day-long forum featured several presentations all to help guide women in using tools and strategies to achieve their marketing goals.
Steve Johnson, a farm management specialist for Iowa State University Extension spoke to a roomful of women during a breakout session encouraging them to get a marketing plan in place and to use marketing tools that are available to them.
“There are 15 marketing tools,” he said, “and in general, in row crops in Iowa, farmers are only using about two.
“They use a hammer and crescent wrench – a spot cash and a forward contract.”
Johnson said he’ conducted 70 meetings since the middle of November throughout the state of Iowa trying to help farmers implement those tools that can be used to market corn and soybeans.
“Rather than just continue this path of outlook, outlook, outlook, at some point and time, you’ve got to stop and put together a written plan and that’s what we have tried to do through the Women Marketing Grain program,” said Johnson.
However, he said, before choosing the right marketing tool, the most important thing is to choose a bias.
“More importantly, what is your bias?” asked Johnson. “What tools should I be using? What’s your bias?”
An example given by Johnson is when deciding on a bias – do you think futures will be going up or down? And with that, do you think the basis is going to strengthen?
“Here’s my bias. I am not a marketing analyst, I am not a commodity broker, grain merchandiser, I am an educator,” said Johnson. “But, my bias was that futures would rally in the spring for corn. We’re still above the harvest low.
“I would primarily focus on cash flow – did you need money this winter? If so, move the bushels. “There’s nothing wrong with moving bushels in the winter. My bias would have been to use basis contracts and minimum price contracts. I don’t like the idea of just a spot cash sale because that means you accept the futures price and the basis price at the same time.”
Basis, Johnson said, is defined as the cash price minus the futures price.
Johnson said it is rare that the best basis comes with the best futures or the best futures come with the best basis.
“Sell for your cash flow needs and sell those commercial-stored bushels and eliminate that cost of storage which is probably around 4 cents a bushel at the co-op,” he said.
“My bias on beans is I have already kissed them goodbye,” said Johnson. “Why would you hang on to your beans?”
Johnson advised the group that with marketing beans, it is always best to use the uncertainty of South American weather.
“Use the South American weather to trigger old and new crop bean sales,” he said. “We knew we were going to plant those 87, 88 or 89 million acres of beans. Leverage off of South American weather and use that uncertainty to price beans.”
The uncertainty of the South American weather is exactly what played out this year, Johnson said with the highest prices coming with the uncertainty of their crop.
“The high for beans is in,” said Johnson. “The party is over for beans in my opinion. I would have sold new crop beans already and I hope you have. And a lot of farmers have. South American uncertainty was to be rewarded.”
Johnson said he has no issues with old crop corn.
“But it’s on your farm, there’s no debt. It’s cold and it’s dry and that is the key,” he said. “My bias would be I am going to wait patiently and take advantage of what I think will be a little bit better basis coming at us in the next 60 days and higher future prices that I think will be coming at us in the next 90 days.”
Johnson said he bases these predictions on seasonal prices and history.
“If it’s new crop, I would have already stepped in and priced new crop corn, but not a lot,” he said. “But, I would have priced a lot of new crop beans because I think we were at price levels that without a major weather event we are probably not going back to, that is my bias.”
Johnson said he doesn’t believe, in general, that farmers have a real good grasp on basis.
“Remember the basis is different than futures,” he said. “The best basis we typically see in the winter is sitting there in November and December.”
“What we are seeing easily is one month of October is when the highest percent of beans is marketed,” he said. “What you notice is beans are marketed the first six months of the marketing year, not the last six months and South America dictates that.”
Johnson said he thinks the best basis opportunities are sitting out in April and May.
“No. 1, there is still a demand for corn and soybeans; No. 2, corn has already sold off 30 cents and beans have sold off a dollar. That should help basis opportunities,” said Johnson. “So, cash minus futures will likely be beneficial in this 60-day period.
“Another reason I like this 60-day period to grab this basis is because farmers are busy and that’s why the basis tends to narrow. This basis is going to be wider compared to history.
“I think corn basis is going to be 10 to 15 cents wider than what we are used to seeing and I think our bean basis is going to be 20 to 40 cents wider.”
Johnson said it is important to recognize this is not going to be a normal basis year due to the large ending stocks.
“I would be looking at what the processor bids are in April and May. Look at where you are delivering the grain,” he said. “If you deliver to a co-op or elevator, that basis is probably going to be 45 to 55 cents under.
“Ethanol plants are probably going to be 30 to 35 cents under.”
Johnson said his bias is there are too many bushels of corn that are going to move this summer.
“I am scared to death of June, July and August,” he said. “Take advantage of a good basis bid in April and May.”
Johnson said he would like to see people get ahead of those large piles of grain being stored outside.
“I don’t think these bunkers are going to disappear during the rainy season, but I think they will disappear in the dry season. The best basis might sit right in April and May for both corn and soybeans.”
Old crop corn
As far as old crop corn, Johnson said he is OK if farmers do not have that old crop priced quite yet.
“I at least want to grab the basis in April and May and stay long in July,” he said. “This is my methodology: what is my time objective? April, May and June is the key.”
Johnson said if there is a rally in July futures, he believes it will most likely rally back into the $3.95 region.
“My price objectives for the July futures are $3.95, $4, $4.05 and $4.10 and that’s it. I don’t think July is going much higher than that, and I pray we get this rally,” he said.
To be the most productive, Johnson recommends finding a price objective in the next 90 days and stick with it.
“Don’t get greedy. Put an offer in to your broker or commodity merchandiser. Convey your price needs to them and don’t get greedy in the next 90 days,” said Johnson. “I am really cautious this market could come apart by the middle of June.”
Johnson recommends tying new crop marketing to crop insurance.
“I want to take the revenue protection crop insurance you’ve had for 16 straight years and turn it into a new crop marketing plan,” he said. “You’re guaranteed the bushels, you’re guaranteed the price.”
The price guarantee for the 2017 crop for crop insurance is $3.96 a bushel for corn and $10.19 a bushel for beans.
“I am guaranteed that revenue, this is critical in my pre-harvest marketing plan,” Johnson said. Leveraging “revenue protection crop insurance as a part of a pre-harvest marketing plan, is a part of the essence of that.”
Johnson said up until a few weeks ago, weather patterns were showing that we were going to expect a “neutral summer.” Those predictions have changed and now it appears we could see the influence of an El Nino weather event and with that, we can expect above-trendline yields.
This potential El Nino event will be the third summer in the row with such weather. So keep that in mind with the last few years with that weather there has been record-breaking yields and not to be too concerned if the spring possibly starts out wet and slower than preferred.
A written plan
Within the Women Marketing Grain programs that have been held this year, Johnson said a marketing plan is designed for each attendee.
The written marketing plan starts with a time objective.
“My time objective is the next 90 days. I am going to get it done from the middle of March to the middle of June,” said Johnson. “I am not going to miss this opportunity again.
“I am going to generate my cash flow from new crop bushels, I am going to have price objectives: both futures as well as cash, so I have got to have an anticipation of what my basis is going to be and that’s probably the biggest risk I am going to have in this plan because that basis could be 50 cents under at the co-ops for harvest delivery so this is probably more so a processor bid.”
Next on a written marketing plan is to use a variety of marketing tools.
“I am going to use cash forward contracts, I am using hedge-to-arrives and if we get past middle of June and the future price rallies even higher than $4.20, I will feather in my puts.”
Knowing why you took the action is also a part of writing a marketing plan.
“Why did you take that action? I took that because I need cash flow, I need money this fall, we can’t store bushels like we have been storing them.”
Those fundamentals are the basics of a crop marketing plan, Johnson said. This plan was recently presented during a conference for ag lenders.
“It’s simple. It’s one page,” he said. “We’re not telling anybody what to do; I don’t know what the futures price is going to do. But I know one thing, I made 1,000 ag lenders happy and that’s not a very happy group.”
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