Your Profit

Agriculture.com Staff 09/11/2008 @ 8:52am

"I never thought these high prices would create so much anxiety in all my customers," was the comment from a seed dealer at a mid-July meeting in northwest Iowa.

This huge rally in commodity prices has created a giddy feeling at some of the meetings of young farmers that I spoke at in May 2008.

The CBOT Weekly Corn chart shows prices rallying up to all-time highs this summer. Increased global demand, more corn going for ethanol, and summer flooding combined to send prices and potential profits sharply higher. Stay with a disciplined scale-up selling plan for your 2008 corn production.

The same rally in corn and soybean prices created some very depressed pork producers a month later.

A common attitude for corn and soybean farmers is one of skepticism about how long this can last, and they have genuine concern about rising input and rental costs. The reality? How well you buy your inputs, market your crops, and manage your working relationship with your landlords does have a huge impact on farm profits.

The following five steps can help you define your plan so you can make rational decisions.

  1. Make an eight to 10% sale of your cash corn and soybeans every month.
    For a lot of farmers, these are the only bushels they had left to sell this summer. This has been a great tool to spread out risk and also to keep some cash flow coming into your checking account every month. If you have a neighbor who feeds livestock, your agreed-upon sales amount each month can create a win-win agreement.
  2. Use seasonal odds to make incremental new crop 2008 sales.
    The historic seasonal pattern projects that the best time period to get new crop sold ahead is usually in the March-July time period. I had several customers who forward-sold 10% of the new crop soybeans every month in March to June and 5% of the 2008 corn crop using the same method. They ended up with a great average and won't have to make any additional sales for storage or cash flow until they get into 2009.
  3. Make your sales based on your return on investment (ROI).
    I personally sold 5,000 bushels of corn ahead that provided a 30% ROI. Two weeks later I sold 10,000 bushels of corn that provided a 60% ROI. The market is now about $1 higher than when I made those sales. My concern is not about what I have sold and how much higher the market has gone; I'm concerned with the bushels I still have to sell.
  4. Use puts and hedges.
    I have hedged about 40% of my crop ahead and used put options to create a floor on another 40%. The puts appear to be worthless at this time, but the loss of 20¢ on a corn put is minimal versus the $2.80 rally in the futures.
  5. Use an advisory service and follow instructions.
    It's always a good idea to ask for clarification if you don't understand a recommendation. But don't follow the advice only part of the time. As one 20-year customer told me, when the news is really bullish and it is the hardest decision to sell, it is usually the most profitable sale at delivery.

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