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Allocating acres

11/16/2012 @ 9:50am

You'd think $8 corn and $17 soybeans would make corn and soybean marketing easy. Not so. In fact, marketing after a drought is more difficult than ever, say farmers.

Four Midwestern farmers share their marketing plans for 2013 and name their favorite market analysts. Then those analysts chime in. Here's their team outlook.

Hunting for acres

For Aron Carlson and his farm partners in northern Illinois (Winnebago), the best marketing move of 2012 was one they didn't make: They stopped selling corn last spring when many market signals said to sell more.

“In a normal year, we'll start selling in 10% increments early in the year, maybe getting up to 30% sold by spring,” says Carlson. “Everything looked so good early, we were thinking a monster crop, and almost sold more. Boy, am I glad we didn't. We have enough corn to fill our contracts, but not a lot to sell at $8.”

Corn on their farms, stretching from the Wisconsin/Illinois border south 50 miles, averaged from 30 to 135 bushels an acre.

Carlson and his three partners farm over 10,000 acres. Most of it is rented; some of it is custom farmed. Usually about 95% of it is corn, but there is incentive to bump the soybean acres next year and perhaps even add wheat.

“Rootworm controls are failing, and we may need some rotation where corn yields drop off,” he says. “Soybeans cost $250 an acre less to grow. Wheat in this area did phenomenally in 2012 – over 100 bushels per acre. The coffee shop talk is that we're going to see more wheat, partly because farmers like that early-summer income.

“Still, it's going to be hard for us to switch many acres from corn. If we can get $6.50 a bushel next fall, I think the budgets are going to favor corn,” he says.

As for marketing the 2013 crop, Carlson thinks the best prices may come early. “I expect a good growing year,” he says. “I think we'll have a big corn acreage number again, 93 to 94 million acres. With a decent crop, we could be looking at $5 corn next fall.

“I think we'll see an acreage hunt in about February, as the competition grows for corn and bean acres. We'll be looking to start 2013 sales then,” he says.

Carlson's favorite market analyst is Bill Fordham, C&S Grain Market Consulting (www.cs-grainmarketconsulting.com) in Ohio, Illinois. Fordham is a retired farmer now in his fifteenth year as a market analyst. He is a commodity broker and does cash marketing for a few neighbors, but the main focus of his work is weekly and occasional bonus reports on the markets. Customers pay a flat $250 a year.

“My advice is to always try to beat the average price of the year,” Fordham says. “I never sell over 10% at a time, and right now my recommendation is to sell in 2.5% increments. With a small crop, it's easy to oversell.”

Here are three of the market movers that Fordham emphasizes to his clients.

1. Crop size. He thinks the current national corn average could come in at 110 bushels an acre, a 25% reduction from the previous year and similar to the 1980s droughts. Of course, that's extremely bullish.

2. Acreage for next year. There will be less corn and more beans and wheat, he believes. “Corn-on-corn is taking it on the chin by about 50 to 100 bushels per acre, depending on the area,” he says. “I'm telling people not to sell 2013 corn yet. We will see $7 there sometime. Corn is going to have to really fight for acres.”

3. Timing. “I rarely like to sell much before December 1 for the coming year,” he says. “I look for seasonal highs in each season. I put a lot of energy into historical averages, and I know the average dates for the seasonal highs. I don't think anyone does more than I do at seeking out those highs and looking for selling windows.

“It's extremely hard to beat the average prices for the year. Just ask farmers how many of them actually do it. That's because it's impossible to know the final average until after the fact. You have to do it in small increments, be consistent, and sell when prices are near the upper bands on the daily charts. That will usually enable you to beat the average,” he says.

More corn in the fringes

This past year is going to linger for a long time, says Betsy Jensen, mixed crop farmer in Stephen, Minnesota. “It is going to have people thinking about their worst-case scenario,” she says. “What is the worst I can do and still keep the farm afloat? We will market accordingly.”

Jensen believes the grain markets will be in a wait-and-see game until at least January 2013. “The national corn crop will be lower than current forecasts indicate,” she predicts. “It will be a changing number until the January USDA report, and I think farmers need to hold off doing any 2013 marketing until then. That is going to be a big report. It will move the market.”

After that, she says, markets will be dominated by demand, which is falling off with high prices. “The biggest problem will be livestock,” she says. “How much demand are we losing from them? The ethanol demand will continue and export demand, too, because they have no other place in the world to get corn. But as for livestock long term, the implications are very big in lost demand.”

One bit of advice Jensen gives is that when or if you lock in any corn prices for 2013, lock in your fertilizer at the same time. “I like to tie those together,” she says. “With higher acres of corn in this market, there's more demand for fertilizer, and that will push prices up. I've heard many examples of farmers who sold corn but didn't account for higher fertilizer.”

Jensen expects more corn next year, partly because fringe areas like hers (northern Minnesota) will plant it. The profit potential for corn exceeds soybeans, wheat, or even the specialty crops (such as sugar beets) they grow there. “We're going to plant more corn on our farm,” she says of her 4,500 acres.

Jensen's favorite market analysts are with Roach Ag Marketing (www.roachag.com). “My weakness in marketing is reading the technical signals from the charts,” Jensen says. “That's their strength. They have their own sell signals, and when they hit them, they sell. It takes the emotion out of it.”

Brian Roach says to look to South America as you ponder 2013 market moves. Everyone knows they are a world giant in soybeans (more acres than the U.S.), and their corn numbers have grown, too (still less than half of U.S.). But because of the short U.S. crop in 2012, Brazil's significance ratchets up. It's imperative that they deliver a good soybean crop. Any weather hiccup south of the equator on the 2013 crop will compound the supply issue, says Roach. “It may give you a chance to take advantage of the counterseasonal premium in the market,” he says. “Any problems in their growing season will give us some price rallies this winter.”

Prices being offered for new-crop 2013 crops are at least as attractive now as last year at this time, Roach says. It wouldn't be a bad move to make sales there and to hope they're your worst of the year. “The biggest risk for a year from now would be a smaller demand [because end-users abandon the market],” he says. “We've had less-than-ideal growing conditions three years in a row. I wouldn't bet on four.”

His best tip is to look at your grain marketing plans fresh with 2012 behind you, and put your biggest bet on a normal crop next year.

Eroding demand

Rhonda Birchmier, Maxwell, Iowa, says she's never been more confused. She and her husband, David, are not alone. Her neighbors find the current grain marketing climate the most perplexing of their lifetimes. “We have no subsoil moisture, and that pattern isn't changing,” she says. “Plus, our continuous corn looks more edgy all the time. There could be some switching to soybeans.

“We've had a chance to sell corn at $8 a bushel, and we've asked ourselves if that can be wrong. But we said the same thing at $6 and $7. Then we've got all the world turmoil. These markets are just crazy,” she says.

The 2012 Birchmier crops have been a mixed bag. Some cornfields made 160 bushels an acre; others far less. “Barren spots are bigger than expected,” she says. “We went 21 straight days without a drop of rain.” Some fields in central Iowa had a hard pan about 1 foot down. What moisture was there, the roots couldn't get to.

Birchmier is a DuPont Pioneer seed sales representative and talks to neighbors frequently. “They're all over the board. Some folks are still holding old crop; others sold way too much at $5. As for 2013, most farmers saw what happened in the summer, and they won't sell much for next year,” she says.

She's most concerned about what this market is doing to erode grain demand for the long haul. “Our competitors around the world are stepping right up to the plate to replace supply,” she says.

Birchmier's favorite market analyst is Virgil Robinson and colleagues at DuPont Pioneer. Robinson tells farm marketers to ask themselves what their measure of success is. “Is it whether you hit the market highs? Or is it whether you meet your marketing plan objectives? If it is about meeting objectives, that's more consistent,” he says.

As he looks to 2013, Robinson starts by saying he's been a big fan of futures options since they became available in the 1980s. More farmers understand them now and can use them to advantage in volatile markets. Put options give you the option of selling an underlying futures contract, locking in a floor price. Call options give you the option of buying a futures contract, profiting when a market moves up. Given the uncertainty now, both puts and calls have a place in your marketing plan, Robinson believes.

“Usually, February is a good month to buy corn options,” says Robinson. “They tend to be less expensive. There's often less risk premium in the cost at that time.” Robinson thinks farmers should budget funds for marketing expenses, just like other costs of production. Then, buying options is like buying crop insurance.

As for acreage shifts next year, Robinson says the determining factor will be local markets and what the soybean:corn price ratio signals. “Traditionally, it takes a 2.3:1 to 2.4:1 ratio or higher to encourage more soybeans,” he says. Recently, the ratio has been about 2.1:1, favoring corn.

Wait-and-see game

It's the drought event of a lifetime. That's how John Lehe, Brookston, Indiana, describes 2012. “Corn around here is in the 80- to 180-bushel-an-acre range, probably more at the lower end. We got 6 inches of rain in August, and beans took advantage of it.

“My 2012 marketing plan was going to start at $6 on corn. But by the time it hit there, it was obvious it was going higher. I sold some, but not much until I knew what I had. I'm conservative,” he says.

Lehe doesn't put much stock in grain market advisory services. They often sell grain too early, he thinks, and most farmers fare better on their own. “Advisory services talk complex strategies, and I tune them out. When they have you pre-sold, usually it is exactly wrong. This year (2012) turned out that way.”

Lehe says 2013 will be a wait-and-see marketing year for him and other farmers who watched crops whither in 2012. “These strong markets aren't going away anytime soon, so I'm in no hurry to sell,” he says. “Any glitch in production, and it will start this whole thing over again.”

While Lehe doesn't endorse any market advisory service, he does like to listen to WILL radio (AM 580) out of Champaign, Illinois, with market analyst Dan Zwicker. Zwicker works for CGB Enterprises, a commercial grain company in Louisiana. He used to be a market adviser, but now only shares his views on radio. Forward or futures contracts are not his preferred method of marketing in turbulent times. “Marketing plans need to be flexible to take advantage of market gains,” he says.

That's why he likes put options, which let you set a floor price but leave the market top open. “I like them early in the growing season, prior to knowing the weather effect on the crop,” he says. “With put options, you have the opportunity to sell if the market moves against you. If you sell 25% with a forward cash sale and it turns out wrong, you're a little like that deer caught in the headlights, not knowing where to go next. That's what happened last year.”

You can get the same effect of buying a put option with a minimum price contract at a local elevator, and they will usually finance it. If you had done that this year, you would have captured all the gain of the summer rally, Zwicker says.

Another good option strategy is to buy a put option and sell a call option to reduce the overall cost, says Zwicker. Last year, if you had bought a $6 put and sold a $7.50 call, it would have been low cost, and you would have capitalized on $1.50 of the summer gain in corn. Zwicker likes that strategy again for 2013.

He says that at today's corn market (near $6.50 a bushel for new-crop 2013), there is at least a $1.50 downside risk, and $2.50 on soybeans.

“In this environment, you should be willing to spend some money to protect yourself. I'd look at that anytime from today until next spring,” he says.