By STEVE JOHNSON
Procrastination and fear of being wrong are probably the primary reasons a farmer doesn't want to develop a written crop marketing plan. Having a written plan develops both a purpose and accountability to market the grain in a timely fashion. Storage and interest charges are accruing on old crop bushels, and many farms are challenged by cash flow and profit margins.
Follow a five-step plan
Consider these five primary steps in developing your written marketing plan for both old and new crop bushels:
- Cost of production, cost of grain ownership and/or desired profit margin
- Price objectives (both futures and cash prices)
- Time objectives
- Marketing tools
- Reason for action
- Cost of production for growing crops will vary greatly and is highly dependent on final crop yields. Consider using your actual production history (APH) yields in prior to harvest. Also, revenue protection crop insurance could mitigate a portion of both the yield and price uncertainty for marketing new crop bushels. Sell a portion of these new crop bushels, especially when new crop futures are above your spring price guarantee. Once the crop is harvested and stored unpriced, grain ownership should reflect both the cost of storage and interest charges. On-farm storage costs are typically lower than commercial storage and can provide more cash market choices.
- Price objectives reflect both the futures price and cash price received. The difference between these two prices is called basis, which reflects the local supply and demand of that crop. Early spring declines in both old and new crop soybean futures have resulted in slightly improved basis opportunities, especially for processor bids offered for late April and May delivery.
- Time objectives should reflect the seasonality of both futures and cash prices. Corn futures prices tend to rally in the spring and early summer months. This period often reflects the greatest uncertainty of production for a crop produced primarily in the northern hemisphere. Soybean futures prices typically rally in both the late fall and early winter months and again in the late spring and summer months.
- Marketing tools to use include several choices. Farmers should consider a variety of marketing tools to spread their risk and attempt to time sales to capture futures when prices are high and/or basis when it narrows. These tend not to occur at the same time so use of spot cash and forward cash contracts can prove limiting. Tools such as hedge-to-arrive, basis and minimum price contracts can separate the decision to accept simultaneously both the futures price and basis.
In addition, should a farmer prefer to manage the futures price yet not commit bushels to delivery; futures hedges and both put and call options should be considered.
- A written crop marketing plan should note the reason for action of a particular marketing strategy or tool. This provides the purpose of why that decision was made, and hopefully reduces the second-guessing that comes with marketing crops. Your written crop marketing plan can remain flexible, should major changes occur to global or local supply and demand components. A commitment to price a portion of your bushels when either price or time objectives occur, whichever comes first, can help overcome emotional challenges.
The components of a crop marketing plan are contained in the Marketing Tools Workbook updated annually on the Iowa Commodity Challenge web site tinyurl.com/iacrops. Old crop corn and soybean transaction logs are found on pages 52 and 53 while new crop corn and soybeans logs are located on pages 58 and 59 of that same online reference.
Steve Johnson can be reached at email@example.com.
Johnson is an ISU Extension Farm Management Specialist