Use the market to cover higher costs, advisers say
CHICAGO, Illinois--Even at the current high grain prices, producers take on risk when they decide not to sell, said a group of marketing consultants visiting the CBOT floor Thursday. Trying to hit the market top, waiting for even higher prices, is a risky approach to gaining higher profitability, according to the market consultants.
SET FLOOR PRICE AT LEAST
Brian Chastain, president of Market Wise Ag Services, Farmer City, Illinois, says that he is telling his clients to take advantage of these price levels. "Look at your cash-forward contracts. Many individuals have the opportunity to lock in prices that they have never experienced off the combines. Now, all they have to do is go and produce it."
Growers should consider minimum-price tools with options, or forward contracts, rather than sitting out there exposed to the risk of these higher level prices, consultants say.
The higher cost of corn production should drive producers to want to make sure they will be able to cover these costs, the consultants say.
Jon Day, Market Wise Ag Services consultant in Chanhassen, Minnesota, says the gap between the government loan amount and break-even is widening. "We're getting into the high $200 level for corn production. Right now we're riding this bull market, but we don't harvest this crop for a year. So, we're putting a lot of money in the ground and producers need to think about how they will recoup the costs."
BEWARE OF OUTSIDE MARKETS
In the past, the grain market fundamentals were known to be crop conditions, weather, and acres. Now, with the grain markets linked to other volatile markets, there is a lot more to consider.
"If the energy prices collapse they could drag the grain markets down with them," Day says.
Day encourages producers to consider locking in minimum prices to set a floor on some of this crop. â€œTry to guarantee yourself some cash flow to pay all of these costs back,â€ Day says.
BACK TO BEANS
As the market marches higher, asking for more soybean acres in 2008, producers in central Illinois seem to be rewarding the market, Chastain says.
The producers that I have contracts with are switching back to soybeans," Chastain says. "I think a lot of the area producers are trying hard to switch back to soybeans."
Chastain adds, They want to get back to 50/50 rotation. The sure volume of bushels, the wear and tear on the equipment and people is a concern. Also, the amount of money they put out for corn makes them nervous."
Though additional wheat acres didn't get planted in central Illinois, more hay/pasture fields have been plowed up, Chastain says.
"This could come into play when we're looking for more soybean acres next year," Chastain says.
In Minnesota, Day says the decision to plant corn vs. beans in 2008 is not as simple as last year.
"This year there was a $75-90 advantage to corn, in 2008 it will be more of a toss up. There's still a slight edge for corn, but more and more producers are going back to a 50/50 rotation," Day says.