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Don't panic, lock in margins

DANIEL LOOKER 11/16/2010 @ 8:13am Business Editor

Even with the recent selloff in corn and bean futures, one specialist isn't swerving from his advice to lock in margins, in part by starting to sell 2011 crops at prices that are relatively high.

"People are operating on emotion. Don't lose track. These are good prices,"  Iowa State University Extension farm management specialist Steve Johnson told farmers, landowners and others at an outlook and management conference in Altoona, Iowa, Friday.

With the exception of higher soybean prices in 2007 and 2008, most farmers have grown crops for years without seeing anything like today's levels for soybeans, he pointed out.

"If you can't run a farm with $12 off-the combine beans....you might think about a different occupation," he said.

Johnson offered a five-point plan for managing risk in an ever-more complicated global market:

  1. Use cash flow needs, basis and storage costs to drive sales of 2010 crops, he said. Right now, higher storage costs for beans versus corn, the likelihood of a weaker basis, and less carry in the market favor selling beans for cash needs and storing corn, he said.
  2. Know your cost of production and manage profit margins. University of Illinois estimates of profit margin per acre, based on actual records of 1,000 northern Illinois farms, are about $400 an acre on corn and more than $250 an acre on soybeans, he said. That suggests that rent, fertilizer and other input costs are going to go higher. Some farmers are already negotiating two years of cash rent, he said.
  3. Plan to use revenue protection crop insurance. That's what revenue insurance will be called in 2011 when crop revenue coverage and revenue assurance with the harvest price option end. The new "combo" coverage will use October to set the fall price level for corn and soybeans.
  4. If you aren't already, use a variety of marketing tools, including cash, forward contracts, hedge-to-arrive contracts, futures markets and options. Put options allow you to take advantage of higher futures prices in the spring without obligating delivery of any bushels, he said.
  5. Lock in 2011 costs and make pre-harvest sales. 

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