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Create a marketing plan for 2012
U.S. corn yields have dropped below the long-term trend line the last two years. Odds of another poor crop in 2012 are very small. A large increase in acres and a good crop could take prices substantially lower by harvest.
As I look at the different supply-demand scenarios for 2012, I see a huge difference in the ending stocks number. This creates a large difference in the prices that I project for corn and soybeans next fall. With this uncertainty and the real possibility of $7 or $4 cash corn at harvesttime in 2012, it's important to have a well thought-out plan for 2012.
So how do you create a flexible marketing plan that allows you to participate in a rally to $7, yet protects you if cash corn drops back to $4 by next fall?
First, write down the three main marketing factors that you're confident of in 2012. Here are the factors in which I am confident.
● Corn acres will increase to 93 to 95 million acres in 2012.
● Odds are 70% that we will have a trend line or better corn yield in 2012.
● Corn prices will have limited upside unless wheat prices turn sharply higher.
Next, list three of the “unknown” factors that you will need to monitor in 2012. Here are three factors that I believe will impact prices this year.
“The bottom line is that 2012 is a year with a lot of uncertainty and a lot of downside risk, especially for corn.”
● The euro debt problem is not going away. Until it does, we have a financial world with a lot of uncertainty and increased downside risk in all commodity markets.
● Ethanol processors are doing OK through the first quarter of 2012, but profitability is uncertain later this year.
● The U.S. dollar index has been in a “trading channel” between 74 and 82 for the last year. A close now in the dollar index above 82 would project prices back to 88 to 92. A strong U.S. dollar would be negative for U.S. and global commodity prices.
The bottom line is that 2012 is a year with a lot of uncertainty and a lot of downside risk, especially for corn.
Now, put your plan together. Here are the three steps in my 2012 risk-management plan.
1. Buy the right RP crop insurance policy for your farm. I am not an insurance agent, so I encourage you to work with a professional who understands your farm and all of the alternatives you should consider. By the time you read this, you will know the February average for December 2012 corn and November 2012 soybean futures. Your rates are likely to be lower in 2012, so evaluate carefully what combination of crop insurance and hedges work best for you.
2. Get 60% to 100% of the insured bushels (A bushels) hedged using hedges or hedge-to-arrive contracts.
The U.S. soybean trend line has gone pretty flat the last several years. In 2012, odds are good that we will get a 44- to 46-bushel-per-acre average yield. That kind of yield on 1 to 2 million soybean acres could send prices lower by harvest.
“I have recommended this type of plan the last four years.”
3. Get put option protection on the uninsured bushels (B bushels). The RP policy you purchase will determine which strike price and how many put contracts to buy.
Farmers who buy RP crop insurance have license to sell. You need to get the insured bushels (A bushels) sold ahead to take full advantage of the crop insurance policies you are purchasing.
Here is an example of how you can figure out how many insured bushels (A bushels) and uninsured bushels (B bushels) you should have.
● Production: 1,000 acres of corn
● Anticipated yield: 200 bushels/A
● Total anticipated crop in 2012: 200,000 bushels
● YP: 160,000 bushels/A
● RP Insurance: 80%
● Insured (A bushels): 160,000
● Uninsured (B bushels): 40,000
I have recommended this type of plan the last four years. Following is a review of the results.
In 2008, the new-crop corn hedges showed a $2-per-bushel gain, the new-crop soybean hedges showed a $3 gain, and the puts were all in the black. In 2008, the size of your crop was not as important to your bottom line as where you hedged the crop and what level of crop insurance you had in place.
In 2009, the hedges showed a small gain at harvest, and you lost the premium that you paid for your December corn and November soybean puts. Producers who had a significant production loss had significant claims, and the crop insurance policies made huge differences to bottom lines.
In 2010, you were behind by 50¢ to 70¢ per bushel on your new-crop corn hedges and over $1 per bushel behind on your new-crop soybean hedges. Unless you had a major hailstorm hit your farm, odds were good you had no insurance claim or you had one for a small amount of money. For most farmers with the fall-winter rally, the 2010 crop year was a good one.
In 2011, the new-crop hedges were in the money by 50¢ to 70¢ on corn and about $1.80 on soybeans. The puts were about a break-even depending on when you bought the puts. Many farmers had a smaller crop, but not small enough to file a claim. For many in the High Plains areas of Kansas, Oklahoma, Missouri, and Colorado, the crop insurance checks were what kept them in business.
What will 2012 bring?
I see the potential for a lot lower prices by the harvest of 2012. With higher land rents and input costs, margins are tight in 2012. This year, having the right crop insurance policy in place and having a large portion of your 2012 crop sold ahead are likely the right marketing and financial moves.
Stick to your three-step risk-management plan. In the years you collect on your RP policies, you need the money to keep farming. In some of the good-profit years, you need the deduction.