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Finalize 2011 marketing plan
This has been a year of records in the corn and soybean markets. Corn went to a record high of $7.99¾, corn futures have traded limit up or limit down a record 35 times this year, and the current USDA projection is for record farm income in 2011.
July 2012 CBOT Corn
For many farmers with trend line or better yields this year, it will be another profitable year. On the other hand, if you are in a drought area, or farming in Ohio where you lived through one of the wettest springs on record, this is proving to be a challenging year. Several farm lenders I know report a huge variation in farm profits this year – even in the states that had good yields.
4 Winning approaches
The farmers who had good profits had these four approaches in the way they marketed.
1. They wrote up a marketing plan. Profitable producers knew their cost of production. And when prices rallied up to a good profit, they began to make sales.
One long-time Iowa customer with 2,000 acres of corn and soybeans and 12 different landlords has a budget and marketing plan for every farm. This is a lot of extra work, but it allows him to see which farms are making money and how much he can afford to pay for rent.
“This has been a year of records in the corn and soybean markets. Corn went to a record high of $7.99¾, corn futures have traded limit up or down a record 35 times this year, and the current USDA projection is for record farm income in 2011.”
2. They made several sales as the markets went up and avoided panicking when prices went lower.
At my firm, I made corn sale recommendations when corn rallied to over $5, sold more when corn rallied to $6.20, and completed the 2010 cash sales when prices rallied to $7.20. I did not hit the top, but I came in with a good average.
3. They used all of the marketing alternatives. The combination of hedges, hedge-to-arrive, and put options, along with the right crop insurance, lets you manage risk and manage your margins.
If you only make cash sales after the crop is in the bin and are not willing to forward-contract or hedge part of your production on spring and summer rallies, it really limits your ability to create an effective plan.
4. They understood grain merchandising. Successful producers used their bins to capture the carry in the market, and they used basis appreciation to maximize income, while managing risk.
July 2012 CBOT Soybeans
4 Losing approaches
The farmers who lost money had these four approaches to marketing their crops.
1. They did not have a plan. They watched the market and hoped it would keep moving higher.
2. They got whipsawed. They tended to let the news of the day get them bullish, and it got them really bullish as prices rallied higher. They also panicked and sold when the news was really bearish. It was an emotional roller coaster, and it is likely to stay that way.
3. They only made cash sales.
4. They sold when they needed the money.
The following is how I will approach marketing the balance of my 2011 crop. I'll also give some alternatives for you to consider for 2012. For both corn and soybeans, I will use three analysis methods to create my marketing plan: the study of price, the study of time, and the study of motion.
Corn. I have most of my customers 40% to 60% sold ahead on the April-June rally. I project lower futures and a wide basis in October, so odds are good that I will not be making any additional cash sales in the next 30 to 60 days.
My Price Plan For Corn. The price targets that I have for the July 2012 corn futures are to make 10% sales if futures rally up to $7.50 and $7.90. This would take sales up to 60% to 80%.
If I have adequate storage, I will place the hedges into the July contract and wait for the basis to improve. If nearby corn can close over $8, I will use that rally to complete cash sales. That's because I do not think it will stay there for long.
Soybeans. I have most of my customers hedged ahead on about 30% to 50% of the 2011 crop. I will avoid making sales over the next 30 to 60 days, as that is the most likely time for the seasonal low and the time when you will likely have the worst basis.
My Price Plan For Soybeans. The price targets where I will make sales are at $14.50, $15.40, and $16.30.
If July 2012 futures rally up to those price levels, I will have 60% to 90% of the 2011 crop sold. I will have the entire 2011 crop sold by late June of 2012, using the seasonal time period to make sales if the price targets are now hit.
My Time Plan. I am looking at four seasonal time periods when I will be making cash sales.
The first important week is the week of November 25, 2011.
The other three weeks are between April 20 and June 22, 2012. I will rarely carry cash grain forward into July of the following year. These are the key weeks that I will watch to make sales for both corn and soybeans.
My Motion Plan. I use a combination of studies that measures the momentum of the market. I use the relative strength index and oscillators. I apply these to the daily, weekly, and monthly charts.
When prices are high and the indexes show that prices are becoming overbought, I will make a series of sales into the market each day that prices move higher.
During the last year, I sold a lot of corn and soybeans on Fridays when the news was bullish and the forecasts were for higher prices. But by Monday of the following week, I was very happy with the sales.
Working the plan
By using a combination of price targets and seasonal selling times, I will get the crop sold one way or the other. This is a simple plan, and I have worked with farmers who have much more complex plans for each farm.
The key lesson to remember: Having a plan is more important than which plan you choose.
For the 2012 crops, I have been recommending some 2012 corn hedges since I bought the fertilizer and fuel ahead and wanted to lock in the dollars I am committing on those input costs.
I will add to the 2012 hedges if December 2012 corn futures rally to $6.90 or higher. And I will begin to hedge 10% to 20% of my 2012 soybean crop if I can get some hedges of at $13.90 or higher.
The news remains very bullish for the corn and soybean markets. But in a world that is struggling with too much debt, having some real profits locked in early on part of your production is good financial planning.
The farmers who were scale-up sellers in 2010 and 2011 and made disciplined incremental sales on the way up had two great years.
I'm betting the farmers who make disciplined scale-up sales for their 2012 crops will have another great year.
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