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Your long-term marketing plan
It's a long time until you plant the crop in 2013, a longer time until you harvest it, and a still longer time until you have to sell it. You have the 2012 and 2013 weather scares to get December 2013 corn back up above $6. When you get to that benchmark, you'll need to consider putting on some 2013 crop corn hedges.
You have to get all of the 2013 crops sold ahead and maybe even some 2014 sold now!” That was the request (demand) that came in late one afternoon on a phone call from a long-time customer. The call came in after all of the bearish news was announced at the USDA Ag Outlook Forum in late February 2012. The mood in farm country was really bearish as prices went lower. I've seen this pattern before.
In the 37 years that I have worked with farmers, I've learned that when someone is upset, worried, or ready to panic, the best thing I can do is listen and ask some questions. This helps me understand the farmer's attitude, his risk profile, and his long-term goals and objectives. This process also helps the farmer figure out how to think his decisions through and how to make a well thought-out marketing decision as opposed to a panic sale.
These are the five questions that I asked my caller.
1. Do you have all of your cash corn and soybeans sold?
2. What percent of your 2012 crop do you have hedged ahead?
3. Do you have your inputs all locked in for 2012? How about 2013?
4. What percentage of your land do you own or have locked up with long-term leases?
5. Why are you so worried today?
Now let's look at how he answered my questions.
1. He still had most of his 2011 corn on hand and over half of his 2011 soybeans. Looking at the current price level and doing a risk-and-reward analysis, he had a lot more risk holding onto such a large part of his cash crop than he had in holding off on selling the 2013 crop ahead. He agreed and made some cash sales that day.
2. He indicated he had 30% of his new-crop 2012 corn hedged ahead and about 20% of his new-crop 2012 soybeans contracted. These sales had been put on in August 2011 at some very attractive price and profit levels.
3. He had all of his 2012 inputs bought, but his 2013 inputs weren't locked in yet.
4. He owned half of the land he farmed, and he had year-to-year cash-rent agreements on the other half.
5. He was really nervous about 2013 because he had read an article on the Internet that was forecasting cash corn to drop below $3 by the fall of 2013. He did not know who had written the article or anything about the author's background.
Then he finally laid it on the line. He had lost a farm he had rented for 20 years, because he did not want to pay $350 per acre cash rent. He was more than worried; he was angry. The combination that day of the bearish article and then losing a farm created a bad day.
December 2013 CBOT Corn
“Farmers tend to make two types of marketing mistakes: getting too much sold ahead too early, and holding on too long.”
3 Scenarios for 2013
Here are three different scenarios that could unfold by the time the caller's combines roll in the fall of 2013.
1. The bearish deflationary price scenario. In this scenario, the economic problems in Europe create a worldwide recession that throws China's economy into a major recession. Global stock and commodity markets move lower, and grain prices drop back to the levels of years 2000 to 2005. The chance of this scenario, I believe, is less than one in 10.
2. The inflationary price scenario. In this scenario, the gold and crude oil markets rally to new all-time highs, the grain markets follow along, and locking in inputs and land costs are major challenges. With the way governments around the world are printing money, I would give this scenario about one in 5.
3. The most likely scenario is for December 2013 corn to trade between $4.80 and $6.50 from now to October 2013. Get ready because the news will be really bearish when/if December 2013 corn futures drop below $5, just like it will be really bullish if futures go over $6.50.
I sent my caller some powerpoint slides from a class I was teaching and a life-of-contract chart of December 2013 corn.
These slides showed that he had at least two crop-scare seasons to go through (April-July 2012 and April-July 2013) before he would harvest his 2013 crop. Odds are incredibly high that it will get too hot, too cold, too wet, or too dry in one of those years, which should create a rally in December 2013 corn futures.
Since my caller has a solid land base, getting 10% to 20% of his 2013 corn hedged ahead at $6 and 10% to 20% of his November 2013 soybeans hedged ahead at $13 is a better long-term plan than panicking when he reads a negative article or when the markets move lower.
He agreed to check on when and where he could lock the price of the fertilizer he would put on in the fall of 2012. He was also going to place some good-until-cancelled hedge orders in so that would place a small part of his 2013 crop on the next rally.
In volatile years, farmers tend to make two types of marketing mistakes. One is getting too much sold ahead too early. The other is holding on too long. That's why having a disciplined plan is key.