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$4.00 corn should be easier to sell, farmer says

Agriculture.com Staff 03/14/2007 @ 9:33am

OSCEOLA, Iowa--Ed Kordick, commodity services manager, Iowa Farm Bureau Federation, said it's an exciting time to teach producers about marketing. But, the price levels make it difficult for the producers to make qualified decisions.

As part of the "Winning the Game" marketing program, Kordick recently gave producers ideas on pre-harvest marketing strategies.

"Since we're at these high price levels, no one has a price reference," Kordick said. "What we need to focus on is the revenue that is on the table."

Producers need to do what they need to do crop insurance wise, but not leave all of the revenue on the table, Kordick said.

"I think it would be very tempting to say the revenue is going to be there the whole year, and I don't need to do any marketing," Kordick said.

In 2007, the market is offering opportunity for producers to be minimum-priced on their marketing and still know money is going to be made on their farm, Kordick said.

Pre-Harvest Strategies

One pre-harvest marketing strategy to set a minimum-price is to forward contract and buy a call option, Kordick said. Example: a forward cash contract price of $6.00, with Nov futures trading at $6.80, and a call at $6.80 strike price has a $0.50 premium. What is the minimum price? With a $6.00 forward contract price, subtract a $0.50 call premium and a $0.01 brokerage fee, the minimum price would be $5.49.

The other minimum-price tool suggested is the purchase of a put option. With this strategy, the minimum price is achieved after subtracting a brokerage fee, a put premium, and an expected basis from a put strike price.

The difference between the two strategies is whether a basis is fixed or not. While both set a minimum price, the producer is urged to calculate which method offers the best minimum price at any given time.

Depending on each producer's cost of operation, Kordick sees nearly $600.00 per acre more gross revenue for corn compared to last year's prices, and $350.00 per acre for soybean production.

Producers Learn to Set Price

Following the marketing seminar, producer participants left unsure which marketing strategy they would choose. However, nearly all of them admitted they took heed of the advice that a minimum price should be set.

During these times of unusual prices, Kordick is stressing minimum pricing to producers.

"If I can get people to understand minimum pricing contracts, options, and some of those types of tools, at least they will have a risk management plan that locks in prices higher than last year. Therefore, if the market wants to go higher they can let it."

Randy Barnard, who farms 700 acres in southern Iowa, says that marketing is just like a weight-loss program: It's tough sticking to his marketing plan.

"I float around on my plan too much," Barnard said. "I need to be more detailed. Because I'm not as detailed, my plans leave me vulnerable to greed and fear."

Barnard added, "I had a neighbor tell me a while back. He said, you'd think $4.00 corn would be easier to sell. It really is not. In the back of your head, you keep thinking it (the market) is going to go higher.

Barnard said he was convinced that if he doesn't stick to a plan, this year's action-packed market could drive him crazy.

"You just need to discipline yourself. Remind yourself there is quite a lot of money out there, and the prudent thing to do is stick with your plan," Barnard said.

Gary Morris, a southern Iowa producer, attended his first-ever marketing seminar this week.

"I need to improve my marketing skills," Morris said. "I need to learn to make a marketing decision when it needs to be made, not when my emotions want to make it. That is tough to do this year, especially."

"At this point, corn-on-corn doesn't make any sense to me," Morris said. "I only have so much grain storage. Plus, with my cattle operation, I need so much hay ground anyway."

Kevin Ludtke, a southeastern Iowa producer, said the swings in the market make it tough to find a price to sell.

"With the price swings, every market move makes a huge difference," Ludtke said. "But, it is a good problem to choose between a good profit and a tremendous profit."

Meanwhile, the current high prices are helping Ludtke's son gain interest in marketing.

"I'm learning it helps to have a base price, and that you should stick with your marketing plan even though prices are fluctuating so much," Jason Ludtke said.

Jason Ludtke, who holds an off-the-farm job, attended his first marketing meeting. He sees his opportunities on the farm growing, because of higher markets.

"It's exciting with the prices and all," Ludtke said. "It's a good time to get started in farming."

The younger Ludtke added, "I've always known you need to have a second job to make it in farming. But, with these prices, it makes it easier to live off the income from the farm."

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