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Managing market scenarios

For many farmers like Roy Wendte, 2011 has been the best of times and the worst of times. Commodity prices generally have maintained lofty peaks, but volatility was part and parcel of these higher prices.

Weather also wreaked havoc for many who were forced to forecast crop yields against a stark backdrop of a late, wet spring, severe floods, drought, wind and hail, and early frost.

Large swings in input costs added high drama. Higher fertilizer costs sustained a trend of higher corn-production costs, leading to higher break-even prices to cover costs. Altogether, USDA estimates producers have drilled 15% more into input costs for the 2011 crop.

And just like the best – and worst – of times in a Dickens novel, world factors played a significant role, precipitating market rallies that diverged markedly from traditional seasonal patterns.

Producers schooled in the need to make a long-term plan – and stick to it – learned in 2010 that lack of flexibility was costly. Today, they're scrambling to develop a real-life set of market scenarios.

Self-sufficiency

Wendte believes that his strategy of purchasing inputs 12 to 28 months ahead is paying off.

Advance booking and on-farm storage of major inputs play a large role in his marketing. In 2007, the Altamont, Illinois, producer built a dry fertilizer shed.

“Part of my marketing strategy is to be self-sufficient,” he says. “I have two years' worth of DAP in storage and 1½ years supply of potash. In 2009, I bought DAP for $290 per ton; this summer, I bought enough of it to fill my shed.”

According to the University of Illinois' farmdoc, fertilizer contract prices for fall delivery were $814 per ton for anhydrous ammonia, $688 per ton for DAP, and $627 for potash. That's $162 per acre higher than 2010 and 2011.

If 2012 actual costs equal projected costs, it would be the second highest on record for central Illinois farms with high-productivity land.

And it's one reason Wendte added a 226×130-foot steel shed with 20-foot sidewalls this past summer. “Now I can store my chemicals in a heated, warm shop and hold onto them longer,” he says.

The shed also features a 15×46×4-foot-deep pit for liquid fertilizer. “I have a loading bay and can load the product on concrete,” he says. The shed also houses his seed dealership, a 120×130-foot shop and a 40×65-foot office space.

Wendte still is looking at diesel. “I'll contract when it's advantageous,” he says. “With crude oil at $82, it might be a good time to buy half or more of my diesel. The only thing I can't lock in is anhydrous. If my major inputs are covered somewhat, I can take a little more risk in marketing,” he says.

Earlier this year, with the Dow dropping sharply and gold going up,Wendte worried that 2011 was starting to shape up like 2008. “Now I think there's a better demand base than in 2008, and it won't be a repeat,” he says.

Wendte's crops had more Btu's than needed, but timely rains produced average to better-than-average yields. “Farmers always wonder if they've sold enough or if they've sold too much,” he says.

“I guess I'm currently betting – hoping – that the supply-and-demand fundamentals will outweigh the economic turmoil of the markets. We may see a decline short term,” he says. “Since I can store all my corn, I'll wait it out because the last couple years have been pretty good.

“If a farmer has excess cash, if he has storage, and if he has locked in some inputs at a good price, then he can take the risk and hold grain until next spring and see what the market does,” he says.

Scenarios in place

Near Plymouth, Indiana, David and Lisa Knepp are sold on scenario planning. For them, 2011 was an average production crop year. “It was in the upper 90° during corn pollination,” David says. “That took a little off the top end yield.”

The Knepps farm 2,200 acres of corn, soybeans, and winter wheat. When they took over management of the farm operation from Lisa's dad in 2009, their biggest question mark was marketing.

“I'm fairly confident about crop production, but marketing was a different story,” David says. “We often bought and sold as needed.”

Lisa began to research other avenues and in 2009, they began working with market adviser Marianne Janka at Stewart-Peterson in West Bend, Wisconsin.

The Knepps use the Market 360 plan. “We apply scenario planning to marketing,” Janka says. “We don't focus on where prices might go. We focus on preparing for what the market might do.”

The Knepps were 50% sold right after planting. “We use puts and calls, so if prices run up, we can participate in the gain,” David says. “If the bottom falls out, we still can take advantage on the crop that hasn't been sold.”

Janka adds, “As a rule of thumb, we look at the crop 18 months in advance. I call every other week or so to discuss. If the market is volatile, it's more often. I often talk to David and Lisa individually because they have different questions.”

The Knepps own two H&R Block offices, and Lisa is an accountant. “David and I approach a lot of things differently,” she says. “I'm more of a detail person, and he's more global. Often I want to know more about individual trades, and he's looking at the overall picture for the crops. To me, it makes for a good combination.”

The Knepps stay aware of the price targets for making sales. “But the plan is very organic,” Janka says. “It changes. We look at market trends and indicators, and also at seasonality. We may start at 50% or 75% sold, but with seasonal weather struggles, we adjust the strategy.”

The Knepps say that working with Janka has resulted in:

● A more consistent marketing program.

● More stable decision-making.

● Encouragement to do more forward contracting.

● Purchasing some calls and puts.

● Fewer market-related arguments.

● More peace of mind with the benefit of outside recommendations.

“Calling and receiving emails from her certainly helps our marketing program,” David says. “After starting with this service, our net income has improved by 25% or more.”

Janka points out, “When the market is moving higher, everyone has a hurdle of making the first sale. Very few ever sell it all at the top. If you don't do anything on the way up, it's very difficult to pull the trigger. If you make incremental targeted sales and seasonal sales, you have more chance to catch the high.”

Crop insurance is key

Near Jacksonville, Illinois, Dale Hadden and his family have encountered two consecutive years of weather-reduced crop yields.

Dale, who farms with his brother, Gary, and parents, Bob and Carolyn, handles most of the marketing. “We've had to change or modify our marketing plan several times this year,” Dale says. “We had 21 inches of rain in June, and it drowned 400 acres of corn that we needed in our marketing. Then we had only 1.5 inches of rain from July through early September. There was no happy medium this year.”

To protect against poor yields, Dale typically studies crop insurance options and ties coverage levels into their marketing program. “We take the time to understand the crop insurance products,” he says. “We set a revenue floor of 85% CRC and built a marketing plan that adds to the floor that we put in place with our crop insurance.”

Then the Haddens turned to market tools to capture optimum prices. “With this floor, we could be a little more aggressive in our marketing and use more hedging tools to pick up premiums,” he says. “Our goal is to sell in the top one third of the market. You can cut expenses and knock off $10 per bushel, but you can gain $40 to $50 per bushel doing a better job of marketing.”

The Haddens are in a prime location to capture good market prices. They typically deliver to three spots on the Illinois river and often to two rail loaders.

It was more challenging this year. “We missed the top a number of times this year,” Dale says. “And because we didn't know for sure what our production would be, we used a few more puts.”

Last June, the Haddens recorded almost 5 inches of rain overnight. They wrapped up a droughty harvest in mid-October, as west-central Illinois fields caught fire during combining.

“One thing I've learned is that the advice I've followed – the fundamentals of selling between March and July to hit the high 80% of the time – I'm not sure it's working with the influence of outside markets and a Dow that drops 300 points,” Dale says.

“We sold grain in May and June, and we got a good basis level by forward-pricing,” he points out. “We started harvesting the last week of August. It's typically not a good time to sell, but this year we sold more corn off the combine than ever before. We hit $7.20 to $7.40, and that may be about as high as corn will be for awhile now.”

As Dale reflects on the best and the worst times of the past year, and he mulls over changes in his marketing for the next year, he says, “Flexible would be the word that comes to mind when pricing 2012.”

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