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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!
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
based on Iowa corn prices received by farmers
Cash corn prices are, on average, lowest at harvest and highest in the spring.
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
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Ontario Iowa
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
based on Minnesota soybeans prices received by farmers
Cash soybean prices are, on average, lowest at harvest and highest in the spring.
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
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Ontario Minnesota
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
based on North Dakota spring wheat prices received by farmers
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
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Ontario North Dakota
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
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?
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
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
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
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
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
Five Common Mistakes in Grain 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
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
Mistake #1The reluctance towards pre-harvest pricing
Are there any seasonal tendencies in futures prices that would favor pre-harvest pricing?
(featuring Terry Timer)
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
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
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
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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
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
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
Year 1-May 1-Aug Change
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
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
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approximate dates
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!
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
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
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
Five Common Mistakes in Grain 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
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
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
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
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
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
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
($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
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
Basis continues to evolve and change. Keep up with the changes.
You must have an opinion!
Mistake #2Failure to understand and track your basis
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
Five Common Mistakes in Grain Marketing
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
sell grain and buy a call
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
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
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
based on Iowa corn prices received by farmers
Is it difficult to understand why May Sellers likes to sell in late May?
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
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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.
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
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
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
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.
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
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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Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
Five Common Mistakes in Grain 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
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
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
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
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
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
In wheat, a narrowing basis pulls cash prices higher after harvest…
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…while basis erosion and a seasonal decline in futures drag cash prices lower starting in early summer
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
Barney may be our benchmark, but let’s compare Hank Holder to May Sellers – two
producers doing the same thing.
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
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?
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
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.
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
Do you want to be May or Hank?
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Would the “pros” ever ignore the 11th Commandment of Grain Marketing?
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Quiz Time!
Can you predict the price of corn?
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
The French QuarterNew Orleans
March 4, 2016
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
Five Common Mistakes in Grain 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
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
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
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
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
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
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
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
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
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
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
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
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
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
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
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
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
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
Peter Paperfarmer
33 opportunities to “re-own” with options in large carry years…
How often did it pay?2 of 22 years in corn
2 of 11 years in wheat
4 of 33 years total (12%)Ouch!
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
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
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
Nov. $12.91
Mar. $12.73
May $12.57Jul. $12.54
Aug. $12.42
Mistake #5
…sell high and
…buy low
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
Peter Paperfarmer
48 opportunities to “re-own” with options in small carry or inverted years…
How often did it pay?1 of 5 years in corn
13 of 27 years in soybeans
5 of 16 years in wheat
19 of 48 years total (40%)Much better odds!
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
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.
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
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.
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
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.
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
What did we learn? Eliminate mistakes!
Five Common Mistakes in Grain Marketing
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