Developing a crop marketing plan
There’s an old adage that states, "failing to plan is planning to fail." Do you plan to fail in marketing your old and new crop corn and soybeans? If the answer is "no" then what is your plan? Could you write it down and share it with your business partner and primary ag lender?
Procrastination and fear of being wrong are probably the primary reasons a farmer doesn’t want to develop a written plan. As long as cash flow demands are met and the storage space is not needed, doing nothing seems logical. However, having a written plan develops both a purpose and accountability to market the grain in a timely fashion. Storage and interest charges are accruing on old crop bushels and many farms are challenged by cash flow and profit margins. Holding multiple years of corn or soybean crops can lead to the erosion of valuable working capital (current assets minus current liabilities) and the need to restructure debt in order to make your cash flow work.
Follow a five-step plan
Consider these five primary steps in developing your written marketing plan for both old and new crop bushels:
- Cost of production, cost of grain ownership and/or desired profit margin
- Price objectives (both futures and cash prices)
- Time objectives
- Marketing tools
- Reason for action
Cost of production for growing crops will vary greatly and is highly dependent on final crop yields. Consider using your actual production history (APH) yields prior to harvest. Also, consider the use of revenue protection crop insurance to mitigate a portion of both the yield and price uncertainty for marketing new crop bushels. Sell a portion of these new crop bushels when newcrop futures are above your spring price guarantee. Once the crop is harvested and stored unpriced, grain ownership reflects both the cost of storage and interest charges.
On-farm storage costs would typically be lower than that of commercial storage. This assumes the grain bins on the farm are paid for. Having the bushels stored on-farm can lead to more choices in determining the best cash bids and where to deliver those bushels. Building new grain storage and making principal payments can use up valuable working capital and add to future cash flow concerns.
Price objectives reflect both the futures price and cash price received. The difference between these two prices is called basis, which reflects the local supply and demand of that crop. With large old crop supplies readily available throughout most of Iowa, basis tends to be wider or weaker than normal. Futures prices have declined since late winter and reflect a large global supply of both corn and soybeans. Weather has not been threatening in most crop producing areas as of the early spring months. Thus, the combination of low futures and wider basis has created lower cash prices and has made marketing old and new crop bushels even more challenging.
However, the recent declines in both old and new crop soybean futures have resulted in slightly improved basis opportunities, especially for processor bids offered for late April and May delivery. This basis improvement may be limited, as the basis at most local elevators and co-ops remains wide, especially for 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. This period often reflects the greatest uncertainty of production for a crop produced primarily in the northern hemisphere. Soybean futures prices typically rally in both the late fall and early winter months and again in the late spring and summer months. That is due to the uncertainty of production that occurs in both the southern and northern hemispheres during these periods.
The seasonality of basis varies geographically because of local supply and demand for those harvested crops. Processor bids tend to narrow in the late fall and early winter months as recently harvested crops are stored. Farmers tend to sell bushels in the later winter months for cash flow purposes. These basis bids tend to be attractive again in the spring months with the focus turning to tillage, planting, and spraying of new crops. Staff at local elevators and co- ops are often busy during this same time frame, thus not available to deliver large volumes of corn and soybeans to the processors.
Marketing tools to use include several choices. Farmers should consider use of a variety of marketing tools to spread their risk and attempt to time sales to capture futures when prices are high or basis when it narrows. These tend not to occur at the same time so use of spot cash and forward cash contracts can prove limiting. 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 options and put options should be considered.
A written crop marketing plan should note the reason for action of a particular marketing strategy or tool. This provides the purpose of why that decision was made, and hopefully reduces the second-guessing that comes with marketing crops. Your written crop marketing plan can remain flexible, should major changes occur to global or local supply and demand components. A commitment to price a portion of the bushels when either price or time objectives occur, whichever comes first, can help overcome emotional challenges.
The components of a crop marketing plan are contained in the Marketing Tools Workbook updated annually on the Iowa Commodity Challenge website. Old crop corn and soybean transaction logs are found on pages 52 and 53 while new crop corn and soybeans logs are located on pages 58 and 59 of that same online reference.
Steven D. Johnson, farm and ag business management specialist, 515-957-5790, firstname.lastname@example.org