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Fine-tune your 2013 marketing plan
The last four years in this column, I have recommended using a three-step risk-management plan for a complete income protection strategy for your farm.
December 2013 CBOT Corn
Here are the three steps that you should implement now.
1. Buy the right Revenue Protection crop insurance policy for your farm. I am not an agent and I do not work for a crop insurance agency. I do not give specific recommendations other than to urge you to work with a qualified crop insurance professional.
2. Get the majority of your insured bushels (your “A” bushels) sold ahead using hedges or hedge-to-arrive contracts. Do this during the spring/summer rally.
3. Get the balance of your production that is not covered with hedges (your “B” bushels) protected with puts.
Coming through the price discovery period of February, you can now figure the amount of revenue that you can guarantee.
With the 2012 drought and the rally to new all-time highs, three main questions have come up in many of the seminars and webinars I held this winter.
1. What did I learn? I learned that when we get back-to-back-to-back droughts, prices can go up further and faster than I could ever imagine. The droughts I am referring to are the late-season drought in the U.S. in 2011, the drought in South America in winter of 2012, and the major drought in the U.S. in the summer of 2012.
With the improved crop in South America this year and the improved moisture in the eastern Corn Belt of the U.S., the fundamentals are stacking up much different for 2013 than they were last year.
2. What would I do differently? Not a lot. I would make sure that I took the harvest price election in 2012. I also would choose the harvest price election for 2013.
If you are not sure of your crop, use more puts and less futures hedges. The three-step risk-management plan overall worked very well for you if you had normal crops and if you had low enough yields to file a crop insurance claim.
3. How will last year's market impact my plans for future years? I strongly encourage you to stick with a rotation that maximizes production. If you were a central Corn Belt farmer who stayed with a normal corn/soybean crop rotation, you had more revenue and profits than the farmers who went 100% corn.
I have always been aware of the financial risk of going 100% to one crop, but now I fully understand the reduction in production risk that you get from a good crop rotation.
New Crops 2013 Soybean/Corn Price Ratio
A look ahead for 2013
After two years of higher grain prices and record-high farm income, 2013 will be more of a challenge for many of you.
Rent costs have increased substantially. This and slight increases in seed, fuel, and fertilizer result in increasing break-even costs by 5% to 12%. At the same time, the new crop 2013 corn and soybean futures are just slightly higher than where the 2012 futures were last year at this same time.
The bottom line is, last year most farmers could project a profit of $100 to $150 per acre for corn and $50 to $100 per acre for soybeans. This year, the projections are less than half of what they were last year. This greatly increases your total risk in farming. That's why making the right risk-management decisions this year is more important than ever.
“Stay disciplined, get your crop insurance policy bought, and be prepared for lower grain prices this year.”
The current soybean/corn price ratio favors corn. For many farmers, it is the only crop they can project a profit on if they are paying significantly higher cash rent.
This sets up a major dilemma. If the U.S. ends up with 98 million or 100 million acres of corn and normal yields, corn futures may drop below $5 per bushel by next fall. If the U.S. stays in a drought, you may need your crop insurance check to pay back your operating loans.
Most of my analysis of grain price cycles projects lower prices by the fall of 2013. So stay disciplined, get your crop insurance policy bought, and be prepared for lower grain prices this year.