By Jon Scheve, Superior Feed Ingredients, LLC
Weather forecasts are positive and crop conditions are favorable. Trade issues are still completely unknown. Dec corn has had a 25-cent trading range in the last 10 trading sessions. For the next 45 days I think weather will still be dictating prices.
Two long-standing orders for my 2018 anticipated corn production against the Dec’ 18 hit last week.
- 5/22/15 — 5% sold at $4.25
- 5/24/18 — 10% sold at $4.28
Current 2018 corn position
With these two sales, just under 40% of my ’18 anticipated production is sold at an average price of $4.22. I have additional option strategies that depending on where corn prices are in late November could add additional sales to my ’18 crop:
- Over $4.20 — 20% more sold at $4.20
- $3.60 to $4.20 — 10% more sold at a level between $4.20 and $4.40
- Below $3.60 — No additional corn sold.
What price level should a farmer start marketing their grain?
I attended a grain marketing seminar recently when a farmer in the audience asked the presenter at what level he should start making sales. The presenter said he couldn’t say without knowing the farmer’s breakeven point. I then quickly asked, “Are you saying that a farmer with a $3.90 breakeven should have a different marketing strategy than a farmer with a $4.30 breakeven? If so, what would be the difference?” The advisor, realizing the flaw in his answer, ultimately never answered the question.
Many advisors recommend that farmers know their breakeven points and scale sales up from there. While I’m a huge proponent of farmers knowing their true break even points and believe it’s absolutely essential when developing a grain marketing strategy, this information alone isn’t enough to build a solid grain marketing foundation for making marketing decisions.
Here is a real examples that illustrates this point. In 2017 I knew two farmers living 75 miles apart. In January both did their budgets assuming normal yields based upon APH yields from their insurance records. Their breakeven points were within 2 cents of each other at $4.15 Dec futures. Once harvest was complete in the fall, Farmer A harvested his worst crop ever with only 50% of the budgeted number of bushels, while Farmer B harvested 25% more than budgeted. This meant Farmer A’s breakeven point increased nearly $2 per bushel to about $6 per bushel. Farmer B’s breakeven decreased $1 per bushel to about $3 per bushel. Regardless of Farmer A’s marketing strategy, he never had a chance to make a profit, while Farmer B didn’t have to have a strategy to make a profit.
It goes without saying that weather and final yield result uncertainty are the hardest things that farmers have to deal with in maintaining a profitable farm operation year after year.
So, should farmers wait to sell until after harvest once final yields are confirmed? I don’t think it’s usually in farmers’ best interest to wait until after harvest to sell because historically the best futures levels usually (but not always) occur during the middle of summer. Plus, farmers can take full advantage of market carry, which is only available if they’ve sold their corn by harvest.
So, how do farmers manage this yield uncertainty? There are a lot of passionate opinions on social media alone on this subject. My philosophy is: I can’t predict when times will be good or bad, so I just plan for a normal or average year. That way I bank the extra profit in the good years and pull from that reserve during the bad ones. Over time farmers who assume normal yields and weather in their marketing plans will fare better than those that try to predict the weather and their yields.
For Farmer A, it was a year of trying to lose the least amount possible. In the end, Farmer A was happy to get $4 for the ’17 crop, because many farmers nearby him complained of only getting $3.60. Farmer B, who also averaged $4, realized their good fortune from their yields, and put some of the additional profits in savings for a future dry year that is inevitable. They were extremely happy to have sold corn for $4 instead of $3.60 as well. For farmer B it was all about maximizing profits last year.
Breakeven points: Additional considerations for farmers
First, farmers need to know their TRUE breakeven point. This value should include fair market rental value for the land they own, a cost of living expense, and custom rates for their equipment to minimizing “fudging” on depreciation and repair costs. All of the other variable costs are pretty straight-forward and easy to budget.
Next farmers should also consider their breakeven point in relation to other farmers across the country. I account for basis levels when doing this because I want to arrive at what the average futures level is for the average farmer across the country. I rely on different University studies across the Corn Belt to help me determine the average farmer’s breakeven point. Then I compare my breakeven to see if it is very near the average farmer or just slightly lower. I feel that if my breakeven points are way below these estimates, then I’m not being aggressive enough with my farming practices or marketing. Conversely, if my breakeven points are higher, then I’m likely either not efficient enough or I’m being too aggressive with risk levels in my marketing.
In my experience, farmers who don’t compare their breakeven to others and estimate too low will often market their grain too early or too low and miss out on their full profit potential. When farmers’ breakeven points are higher than average, they risk never having a chance to sell their grain at profitable levels. These farmers might want to find ways to reduce costs rather than hope for significant rallies to make up the difference.
I find that with this kind of information, I have a good foundation to maximize my profit potential and can develop a solid grain marketing strategy. The market seems to almost always trade at some point in the year at or above the breakeven point of the average farmer. I want to be ready for that price level and have a portion of my grain sold at that point. Then I can scale up my sales beyond that value within my marketing strategy.
Jon grew up raising corn and soybeans on a farm near Beatrice, NE. Upon graduation from The University of Nebraska in Lincoln, he became a grain merchandiser and has been trading corn, soybeans and other grains for the last 18 years, building relationships with end-users in the process. After successfully marketing his father’s grain and getting his MBA, 10 years ago he started helping farmer clients market their grain based upon his principals of farmer education, reducing risk, understanding storage potential and using basis strategy to maximize individual farm operation profits. A big believer in farmer education of futures trading, Jon writes a weekly commentary to farmers interested in learning more and growing their farm operations.
Trading of futures, options, swaps and other derivatives is risky and is not suitable for all persons. All of these investment products are leveraged, and you can lose more than your initial deposit. Each investment product is offered only to and from jurisdictions where solicitation and sale are lawful, and in accordance with applicable laws and regulations in such jurisdiction. The information provided here should not be relied upon as a substitute for independent research before making your investment decisions. Superior Feed Ingredients, LLC is merely providing this information for your general information and the information does not take into account any particular individual’s investment objectives, financial situation, or needs. All investors should obtain advice based on their unique situation before making any investment decision. The contents of this communication and any attachments are for informational purposes only and under no circumstances should they be construed as an offer to buy or sell, or a solicitation to buy or sell any future, option, swap or other derivative. The sources for the information and any opinions in this communication are believed to be reliable, but Superior Feed Ingredients, LLC does not warrant or guarantee the accuracy of such information or opinions. Superior Feed Ingredients, LLC and its principals and employees may take positions different from any positions described in this communication. Past results are not necessarily indicative of future results. He can be contacted at firstname.lastname@example.org.