five common mistakes in grain marketing · 18/02/2018 · five common mistakes in grain marketing...

Five Common Mistakes in Grain Marketing

Edward Usset, Grain Marketing EconomistUniversity of MinnesotaColumnist, Corn & Soybean [email protected] www.cffm.umn.edu

Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.

Grain Marketing is Simple

Behold a seasonal price pattern that has held true for decades!


based on Iowa corn prices received by farmers

Cash corn prices are, on average, lowest at harvest and highest in the spring.


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)Ontario and Iowa Corn Prices, 2008-2015 crop years

Ontario Iowa


based on Minnesota soybeans prices received by farmers

Cash soybean prices are, on average, lowest at harvest and highest in the spring.


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)Ontario and Minnesota Soybean Prices, 2008-2015 crop years

Ontario Minnesota


based on North Dakota spring wheat prices received by farmers


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)Ontario and North Dakota Spring Wheat Prices, 2009-2015 crop years

Ontario North Dakota


A Different Approach to Marketing

A marketing plan is a proactive strategyto price your grain that considers your financial goals, cash flow needs, price objectives, storage capacity, crop insurance coverage, anticipated production, and appetite for riskProactive, not reactive, not overactive

What is a Marketing Plan?


Barney Binless

Barney has no marketing plan, no storage and no interest in early pricing. He is our benchmark - his price is the harvest price each year.

…and not inactive


Marketing is Important!

The average farm earns 20-30 cents per bushel (including gov’t payments). Just 10 cents more per bushel could increase net income by 33-50%!

Great marketing is not finding the high price. It’s finding an extra 10-20 cents per bushel with a solid plan that eliminates mistakes.

A Different Approach to Marketing



1. The reluctance towards pre-harvest pricing2. Failure to understand and track your basis3. Lack of an exit strategy 4. Holding grain in storage too long5. Thinking you avoid storage costs when you

sell grain and buy a call


Mistake #1The reluctance towards pre-harvest pricing

Are there any seasonal tendencies in futures prices that would favor pre-harvest pricing?

(featuring Terry Timer)


Terry Timer

Terry pays attention to the seasonal highs in new crop futures prices by pricing 25% increments in March, April and May. In 2018, she won’t sell Dec corn <$4.25, Nov soybeans <$9.75, or Sep HRS wheat <$6.00 per bushel.

Year 1-May 1-Oct Change

2000 2.62 1.99 (0.63)

2001 2.27 2.11 (0.16)

2002 2.20 2.56 0.36

2003 2.33 2.20 (0.13)

2004 3.17 2.06 (1.11)

2005 2.27 2.06 (0.21)

2006 2.72 2.68 (0.04)

2007 3.79 3.69 (0.10)

2008 6.32 4.84 (1.48)

2009 4.33 3.41 (0.93)

2010 3.92 4.66 0.74

2011 6.61 5.93 (0.69)

2012 5.39 7.57 2.18

2013 5.51 4.39 (1.12)

2014 5.00 3.21 (1.78)

2015 3.80 3.89 0.09

2016 3.97 3.37 (0.60)

2017 3.95 3.52 (0.43)

Average 3.90 3.56 (0.34)

CBOT December Corn Futures, 2000-201714 years (78%) the market

declined

4 years (22%) the market improved


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Chicago December Corn Futures, 2000-2016 average

Don’t forget to sell something!

But remember your minimum price.

MGEX September SpringWheat, 2000-201710 years (56%) the market

declined8 years (44%) the market

improved

Year 1-May 1-Aug Change

2000 3.35 2.97 (0.38)

2001 3.47 3.16 (0.31)

2002 3.01 3.80 0.80

2003 3.39 3.70 0.32

2004 4.24 3.53 (0.71)

2005 3.46 3.50 0.04

2006 4.28 4.69 0.40

2007 5.24 6.32 1.08

2008 8.77 8.74 (0.03)

2009 6.77 6.05 (0.72)

2010 5.49 7.13 1.64

2011 9.34 8.34 (1.00)

2012 7.75 9.38 1.63

2013 8.19 7.42 (0.77)

2014 7.72 6.16 (1.56)

2015 5.45 5.17 (0.28)

2016 5.57 4.85 (0.73)

2017 5.68 7.18 1.51

Average 5.62 5.67 0.05


2000 3.35 2.97 (0.38)

2001 3.47 3.16 (0.31)

2002 3.01 3.80 0.80

2003 3.39 3.70 0.32

2004 4.24 3.53 (0.71)

2005 3.46 3.50 0.04

2006 4.28 4.69 0.40

2007 5.24 6.32 1.08

2008 8.77 8.74 (0.03)

2009 6.77 6.05 (0.72)

2010 5.49 7.13 1.64

2011 9.34 8.34 (1.00)

2012 7.75 9.38 1.63

2013 8.19 7.42 (0.77)

2014 7.72 6.16 (1.56)

2015 5.45 5.17 (0.28)

2016 5.57 4.85 (0.73)

2017 5.68 7.18 1.51

Average 5.62 5.67 0.05

Wheat shows the need for a minimum price!

Let’s exclude 9 years when the selling price on May 1 was less than production costs.

MGEX September SpringWheat, 2000-20176 years (67%) the market

declined3 years (33%) the market

improved


2004 4.24 3.53 (0.71)

2006 4.28 4.69 0.40

2007 5.24 6.32 1.08

2008 8.77 8.74 (0.03)

2009 6.77 6.05 (0.72)

2011 9.34 8.34 (1.00)

2012 7.75 9.38 1.63

2013 8.19 7.42 (0.77)

2014 7.72 6.16 (1.56)

Average 6.92 6.74 (0.18)

Remove years when May 1 price < production costs


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September MGEX Spring Wheat Futures, 2000-2016

Years when May 1 price is higher than production costs (excludes 2000-03,05,10,15,16)

Don’t forget to sell something!


Terry vs. Barney, 1990-2017

Barney Terry > / = to Barney

Corn 2.78 2.89 22/28 years

Soybeans 7.02 7.23 20/28 years

HRS Wheat 4.60 4.70 20/28 years

Barney Binless represents the harvest price.

Terry is only willing to price insured bushels, or up to 75% of her crop, if the price opportunity is above production costs.

For the record, Terry made no pre-harvest sales in 8 years in corn, 6 years in soybeans, and 8 years in wheat. She made partial sales in another 3 years in corn and wheat.

• The 2nd Edition is now available!

• Completely revised and updated

• Written for producers

• Five common mistakes in marketing, pre- and post-harvest marketing plans

• New section on pricing tools!

• Meet Covered Cal and other celebrity producers

https://www.cffm.umn.edu/simple/

To save $10, type in the code…

SIMPLE

at checkout (note ALL CAPS)

no celebrity!

None of my celebrity producers does a good job of speaking to the important subject of basis and the impact it can have on grain marketing decisions.

?Mistake #2

Failure to understand and track your basis


cash price - futures price = basis

In the grain trade, cash prices are quoted as a basis of so many cents "under" or "over" the futures price. This practice goes back over 100 years.

Mistake #2Failure to understand and track your basis



Basis links the “general” (futures prices) to the “specific” (local cash prices)

Key basis factors include….• transportation costs and availability• local supply and demand for the grain, and for grain storage

Grain basis patterns are broadly similar from one year to the next

Basis tends to be weakest at

harvest

…reach highs in

late spring

…and slide back toward

harvest levels in summer


($0.50)

($0.40)

($0.30)

($0.20)

($0.10)

$0.00

$/bu

shel

Red River Valley Nearby Wheat Basis, 2000-2016

Nearby Basis = Cash Price - Nearby Wheat FuturesBasis tends to be weakest at

harvest

…reach highs in

late spring

…and slide back toward

harvest levels in summer


Basis continues to evolve and change. Keep up with the changes.

You must have an opinion!




1. The reluctance towards pre-harvest pricing2. Failure to understand and track your basis3. Lack of an exit strategy4. Holding grain in storage too long5. Thinking you avoid storage costs when you



May has on-farm storage. Every year she holds her crop in the bin to sell in late spring. Her price is the cash price in the month of May, less storage costs.

Mistake #3Lack of an exit strategy

May Sellers


based on Iowa corn prices received by farmers

Is it difficult to understand why May Sellers likes to sell in late May?


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)North Dakota Spring Wheat Prices, 1990-2016 crop years

Olympic average excludes 2007/08 & 2008/09

based on North Dakota spring wheat prices received by farmers

Cash wheat prices are, on average, lowest at harvest, highest in spring, but May sells first week of December.


Do you have unpriced grain in the bin?

May Sellers has an exit strategy.

Do you have an exit strategy?

Mistake #3: Lack of an exit strategy


May vs. Barney, 1990-2016

May Barney May’s advantage

> / = to Barney

Corn 2.98 2.78 0.20 17/27 years

Soybeans 7.56 6.95 0.61 18/27 years

HRS Wheat 4.68 4.53 0.15 17/27 years

Barney Binless represents the harvest price.

Due to storage limitations, May sells 20% of her grain at harvest, and this sale is part of his average price.

May’s results are net of on-farm storage costs.


Price driven exit strategies: Sell grain at $X.XX, or XX cents over harvest price, or use a trailing stop

Timing driven exit strategies: Sell grain when the trend turns down, or at regular intervals over a time period, or sell at the end of May

Mistake #3: Lack of an exit strategy

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Hank is our perennial bull, always convinced that prices are about to surge higher. But Hank only has enough storage for one crop, so each year he is forced to sell the previous years’ crop right before harvest, to make room for the new crop. His price is the following harvest price, less storage costs.

Mistake #4Holding grain in storage too long

Hank Holder


Hank breaks…The 11th Commandment of Grain Marketing

“Thou shall not hold unpriced corn or soybeans in the bin beyond July 1”

Mistake #4Holding grain in storage too long

Hank Holder

June 1 for spring wheat


In wheat, a narrowing basis pulls cash prices higher after harvest…


…while basis erosion and a seasonal decline in futures drag cash prices lower starting in early summer


Barney may be our benchmark, but let’s compare Hank Holder to May Sellers – two

producers doing the same thing.


May Sellers vs. Hank HolderHow much harm can occur by holding…

corn for 19 weeks?or, soybeans for 18 weeks?or, spring wheat for 37 weeks?


Hank vs. May, 1990-2016

May’s advantage

May Hank > / = to Hank

Corn 2.98 2.52 0.46 20/27 years

Soybeans 7.56 6.62 0.94 22/27 years

HRS Wheat 4.68 4.34 0.34 18/27 years

How much harm can occur? Too much!

Due to storage limitations, May and Hank sell 20% of their grain at harvest, and this sale is part of their average price.

May and Hank’s results are net of on-farm storage costs.


Do you want to be May or Hank?


Would the “pros” ever ignore the 11th Commandment of Grain Marketing?


Quiz Time!

Can you predict the price of corn?


The French QuarterNew Orleans

March 4, 2016


Peter has no storage, but he is convinced that it pays to “re-own” his crop with call options. He gets the harvest price each year, plus any profit or loss from buying an at-the-money call option at harvest and holding to expiration.

Mistake #5Thinking you avoid storage costs when you sell grain and buy a call

Peter Paperfarmer


To understand the mistake in “paper farming” demands a clear understanding of carrying charges in the market.

What are carrying charges?

Mistake #5Thinking you avoid storage costs when you sell grain and buy a call

Peter Paperfarmer


July $4.70

May $4.62

March $4.54

Dec. $4.42

What determines price differences between delivery months (e.g. December vs. March corn)? Is it expectations?

These price differences reflect market determined storage costs (aka carrying charges). Large carrying charges, where deferred contracts trade at a premium to nearby contracts, are common when free supplies are large.

CBOT Corn Futures October 18, 2013

Mistake #5


Nov. $12.91

Mar. $12.73

May $12.57Jul. $12.54

Aug. $12.42

Inverse Carrying Charges: An inverted market represents the opposite of a carrying charge market – deferred contracts trade at a discount to nearby contracts.

This occurs when supplies are small - a scarcity of stocks. The market says "we will pay a premium if you deliver now!"

Mistake #5CBOT Soybean Futures

Oct 18, 2013


Peter Paperfarmer

27 years of data (1990-2016) and 3 different crops (corn, soybeans and wheat) = 81 chances to “re-own” with options after harvest


81 opportunities to “re-own” with options after harvest

How often did it pay?3 of 27 years in corn

13 of 27 years in soybeans

7 of 27 years in HRS wheat

23 of 81 years total (28%)A tad better than expected!

Peter Paperfarmer


How about years when the carry is large at harvest?

22 corn years

11 wheat years

Paper farming in 33 “large carry” years: Will this increase or decrease our odds for success with paper farming?

Peter Paperfarmer


July $4.70

May $4.62

March $4.54

Dec. $4.42

Mistake #5

In a large carry market, paper farming asks you to…

…sell low and

…buy high


Peter Paperfarmer

33 opportunities to “re-own” with options in large carry years…


2 of 11 years in wheat

4 of 33 years total (12%)Ouch!


How about years when the carry is small or inverted at harvest?

5 corn years

27 soybean years

16 wheat years

Paper farming in 48 “small carry or inverted” years: Will this increase or decrease our odds for success with paper farming?

Peter Paperfarmer


Nov. $12.91

Mar. $12.73

May $12.57Jul. $12.54

Aug. $12.42

Mistake #5

…sell high and

…buy low


Peter Paperfarmer

48 opportunities to “re-own” with options in small carry or inverted years…


13 of 27 years in soybeans

5 of 16 years in wheat

19 of 48 years total (40%)Much better odds!


Peter vs. Barney, 1990-2016

Barney Peter > / = to Barney

Corn 2.78 2.72 3/27 years

Soybeans 6.95 7.27 13/27 years

HRS Wheat 4.53 4.54 7/27 years

•Barney Binless represents the harvest price.

•Peter’s purchases ATM calls on July corn and soybeans on November 1 (May ATM wheat calls on September 1) and holds to expiration. Results are net of premium and brokerage costs.


July $4.70

May $4.62

March $4.54

Dec. $4.42

Mistake #5

Because carrying charges reflect a market determined storage cost, you cannot avoid storage costs by selling nearby and buying deferred futures contracts when carrying charges are positive.


Nov. $12.91

Mar. $12.73

May $12.57Jul. $12.54

Aug. $12.42

Mistake #5

Storage costs are only avoided if the market is inverted, a situation when paper farming makes some sense.


What did we learn? Eliminate mistakes!


Terry Timer showed us the value of pre-harvest marketingKnow your local basis

Grain in the bin? May Sellers has an exit strategy. What is your exit strategy?Hank Holder pays the price for disobeying the 11th CommandmentPeter Paperfarmer showed us the power of carrying charges

Thank you!

five common mistakes in grain marketing · 18/02/2018 · five common mistakes in grain marketing...

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