What is your crop marketing plan?
Why don’t farmers develop written plans for old and new crop marketing, especially in the early spring as futures prices tend to rally and volatility increases?
Having a written plan can develop both a purpose and accountability to market that grain. Storage costs and interest charges are not free. Many farms have cash flow challenges in the pursuit to find profitable margins. Holding multiple years of corn and/or soybean crops can lead to the erosion of valuable working capital (current assets minus liabilities) that can lead to the need to restructured existing debt in order to make the annual cash flow work.
Five-step marketing plan
Consider these five primary steps in developing your written marketing plans for both old and new crop bushels.
1. Cost of production, cost of grain ownership and/or desired profit margin
2. Price objectives (both futures and cash prices)
3. Time objectives
4. Marketing tools
5. Reason for action
Cost of production for growing crops will vary greatly and is highly dependent on the final crop yields. However, revenue protection crop insurance mitigates a portion of both the yield and price uncertainty for marketing new crop bushels. Consider the use of the farm’s actual production history (APH) and determine the APH breakeven in the spring. Build in a profit margin for new crop bushels, but be reasonable.
Storing bushels unpriced beyond harvest has both futures and basis price risk. Cost of grain ownership reflects both storage and interest charges. On-farm storage costs would typically be lower than that of commercial storage. This assumes that your grain bins are paid for. Building new grain storage and making principal and interest payments can use up a farm’s valuable working capital.
Setting price and time objectives
Establishing futures price objectives in the early spring is critical for both old and new crop bushels. This is when crop futures prices typically peak, especially corn when U.S. and global supplies are not as burdensome as in recent years. However, ending stocks for soybeans are expected to remain large in 2019. Wet spring planting conditions could benefit corn future prices more than that of soybeans.
Time objectives should reflect the seasonality of both futures and cash prices. Corn futures prices tend to rally in the spring and early summer months, reflecting the greatest uncertainty of production for a crop produced primarily in the northern hemisphere. Soybean futures prices are typically higher in both the late fall and early winter months and again in the late spring and summer months. That’s due to the uncertainty of production that occurs in both the southern and northern hemispheres.
Farmers should use a variety of marketing tools to spread their risk and attempt to time sales to capture futures when prices are high and/or basis when it narrows. Tools such as hedge-to-arrive, basis and minimum price contracts can separate the decision to accept simultaneously both the futures price and basis. In addition, should a farmer prefer to manage the futures price yet not commit bushels to delivery, tools such as futures hedges and the use of both call and put options can be utilized.
Finally, a written crop marketing plan should note the reason for your action of using a particular marketing strategy or tool. This provides the accountability of why that decision was made and hopefully reduce the second-guessing that comes with the uncertainty of making pricing decisions. You can find blank old and new crop marketing plans contained in the Marketing Tools Workbook updated annually on the Iowa Commodity Challenge web site: tinyurl.com/iacrops
Steve Johnson is an Iowa State University Extension and Outreach farm management specialist. He can be reached at email@example.com.
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