Five Common Mistakes in Grain Marketing · MGEX September Spring Wheat, 2000-2020 12 years (60%)...

Five Common Mistakes in Grain Marketing

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

2020 MinnesotaCrop Insurance

Conference

Copyright © 2019 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 MN corn prices received by farmers

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


based on MN soybeans prices received by farmers

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


Monthly prices: USDA/NASS

Futures prices: CME Group closing prices

Cash prices: Corn and soybeans: Pipestone MN Average Iowa prices, 1990-2019

Spring wheat: Red River Valley, 1990-2019

About the data…

N = 30 and No replication crisis


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



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 2021, she won’t sell Dec corn <$4.25, Nov soybeans <$9.75.

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)

2018 4.20 3.66 (0.54)

2019 3.86 3.93 0.06

2020 3.37

Average 3.91 3.58 (0.33)

CBOT December Corn Futures, 2000-202015 years (75%) the market

declined

5 years (25%) the market improved


Don’t forget to sell something!

but remember your minimum price...


2000 5.80 4.90 (0.90)

2001 4.34 4.52 0.18

2002 4.56 5.42 0.86

2003 5.53 6.87 1.34

2004 7.45 5.35 (2.10)

2005 6.22 5.73 (0.49)

2006 6.26 5.45 (0.81)

2007 7.84 9.92 2.08

2008 11.93 10.53 (1.40)

2009 9.71 9.18 (0.53)

2010 9.76 10.57 0.81

2011 13.74 11.79 (1.95)

2012 13.93 15.60 1.68

2013 12.09 12.68 0.59

2014 12.26 9.17 (3.09)

2015 9.41 8.77 (0.64)

2016 10.18 9.54 (0.64)

2017 9.65 9.57 (0.07)

2018 10.51 8.58 (1.93)

2019 8.73 9.20 0.47

2020 8.55

Average 8.99 8.67 (0.33)

CBOT November Soybean Futures, 2000-202012 years (60%) the market

declined




2000 5.80 4.90 (0.90)

2001 4.34 4.52 0.18

2002 4.56 5.42 0.86

2003 5.53 6.87 1.34

2004 7.45 5.35 (2.10)

2005 6.22 5.73 (0.49)

2006 6.26 5.45 (0.81)

2007 7.84 9.92 2.08

2008 11.93 10.53 (1.40)

2009 9.71 9.18 (0.53)

2010 9.76 10.57 0.81

2011 13.74 11.79 (1.95)

2012 13.93 15.60 1.68

2013 12.09 12.68 0.59

2014 12.26 9.17 (3.09)

2015 9.41 8.77 (0.64)

2016 10.18 9.54 (0.64)

2017 9.65 9.57 (0.07)

2018 10.51 8.58 (1.93)

2019 8.73 9.20 0.47

2020 8.55

Average 8.99 8.67 (0.33)


declined


Soybeans show the need for a minimum price!


2000 5.80 4.90 (0.90)

2001 4.34 4.52 0.18

2002 4.56 5.42 0.86

2003 5.53 6.87 1.34

2004 7.45 5.35 (2.10)

2005 6.22 5.73 (0.49)

2006 6.26 5.45 (0.81)

2007 7.84 9.92 2.08

2008 11.93 10.53 (1.40)

2009 9.71 9.18 (0.53)

2010 9.76 10.57 0.81

2011 13.74 11.79 (1.95)

2012 13.93 15.60 1.68

2013 12.09 12.68 0.59

2014 12.26 9.17 (3.09)

2015 9.41 8.77 (0.64)

2016 10.18 9.54 (0.64)

2017 9.65 9.57 (0.07)

2018 10.51 8.58 (1.93)

2019 8.73 9.20 0.47

2020 8.55

Average 9.54 9.07 (0.47)

Remove years when Nov beans were clearly below production costs on May 1


declined

8 5 years (29%) the market improved

MGEX September SpringWheat, 2000-202012 years (60%) the market

declined


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

2018 6.29 6.08 (0.21)

2019 5.21 5.19 (0.03)

2020 5.18

Average 5.63 5.67 0.03

MGEX September SpringWheat, 2000-2020


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

2018 6.29 6.08 (0.21)

2019 5.21 5.19 (0.03)

2020 5.18

Average 5.63 5.67 0.03

Wheat also shows the need for a minimum price!

Let’s exclude 11 years when the selling price on May 1 was less than production costs.

MGEX September SpringWheat, 2000-20207 years (70%) the market

declined



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)

2018 6.29 6.08 (0.21)

Average 6.86 6.67 (0.19)


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September MGEX Spring Wheat Futures, 1990-2019

Years when May 1 price is higher than production costs (excludes 91,93,94,99‐2003,05,10,15‐17,19)

Don’t forget to sell something!


Terry vs. Barney, 1990‐2019

Terry Barney Terry’s advantage

> / = to Barney

Corn 3.07 2.91 0.16 25/30 years

Soybeans 7.49 7.18 0.31 21/30 years

HRS Wheat 4.74 4.62 0.12 23/30 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 (i.e., Terry = Barney) in 7 years in corn, 6 years in soybeans, and 9 years in wheat.


The Iowa department of agriculture estimates more than 57 million bushels of permanently licensed grain storage was seriously damaged or destroyed. (as of December 2019, Iowa had 1.51 bb of off-farm storage capacity, and 2.1 bb of on-farm capacity.

Market analyst Arlan Suderman estimates the loss at 200 - 400 million bushels. Damaging winds were felt over about 6.5 million acres of corn. His estimate factors in the benefit of the rain that fell in some of the very dry areas of Iowa.





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 #2Failure 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.




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


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Red River Valley Nearby Wheat Basis, 2000-2018

Nearby Basis = Cash Price - Nearby Wheat Futures


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


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



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, 1990‐2019

May Barney May’s advantage

> / = to Barney

Corn 3.07 2.91 0.16 18/30 years

Soybeans 7.70 7.18 0.52 21/30 years

HRS Wheat 4.75 4.62 0.13 19/30 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.

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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 corn, 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, 1990‐2019

May Hank May’s advantage > / = to Hank

Corn 3.07 2.67 0.40 22/30 years

Soybeans 7.70 6.78 0.92 22/30 years

HRS Wheat 4.75 4.38 0.37 21/30 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.






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 #5

CBOT Soybean Futures Oct 18, 2013


Peter Paperfarmer

30 years of data (1990-2019) and 3 different crops (corn, soybeans and wheat) = 90 chances to “re-own” with options after harvest


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

How often did it pay?4 of 30 years in corn

13 of 30 years in soybeans

7 of 30 years in HRS wheat

24 of 90 years total (27%)A tad better than expected!

Peter Paperfarmer


How about years when the carry is large at harvest?

25 corn years

3 soybean years

14 wheat years

Paper farming in 42 “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

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



2 of 14 years in wheat

7 of 42 years total (17%)


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…



5 of 16 years in wheat

17 of 48 years total (35%)


Peter vs. Barney, 1990‐2019

Peter Barney Peter’s advantage

> / = to Barney

Corn 2.86 2.91 (0.05) 4/30 years

Soybeans 7.42 7.18 0.27 13/30 years

HRS Wheat 4.58 4.62 (0.04) 7/30 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.


Objective: Buy crop insurance to protect my production risk and price 75% of my anticipated corn crop (per APH yield) by late June.

Price 10,000 bushels at $3.75 cash price ($4.25 Dec. futures) using forward contract/futures hedge/HTA contractPrice 10,000 bushels at $4.05c/4.55f, or by March 29, pricing tool tbdPrice 10,000 bushels at $4.35c/4.85f, or by April 27, pricing tool tbdPrice 15,000 bushels at $4.65c/5.15f, or by May 26, pricing tool tbdPrice 10,000 bushels at $4.95c/5.45f, or by June 10, pricing tool tbd Price 10,000 bushels at $5.25c/5.75f, or by June 24, pricing tool tbdPlan starts on January 1, 2021. Earlier sales may be made at a 40 cent premium and would be limited to 30,000 bushels.Ignore decision dates and make no sale if prices are lower than $3.75 local cash price/$4.25 December futures.Exit all options positions by mid-September 2021.

Corn 2021 Pre‐Harvest Marketing Plan

Dec’21 @ $3.85


Objective: Buy crop insurance to protect my production risk and price 75% of my anticipated soybean crop (per APH yield) by late June.

Price 5,000 bushels at $9.00 cash price ($9.75 Nov. futures) using forward contract/futures hedge/HTA contractPrice 5,000 bushels at $9.75c/10.50f, or April 27, pricing tool tbd Price 2,500 bushels at $10.50c/11.25f, or by May 26, pricing tool tbd Price 5,000 bushels at $11.25c/12.00f, or by June 24, pricing tool tbd

Plan starts on January 1, 2021. Earlier sales may be made at a 75 cent premium and would be limited to 10,000 bushels.Ignore decision dates and make no sale if prices are lower than $9.00 local cash price/$9.75 November futures.Exit all options positions by mid-September 2021.

Soybeans 2021 Pre‐Harvest Marketing Plan

Nov’21 @ $9.50


Why would you price grain below production costs?

• Sometimes we maximize profits, and sometimes we minimize losses

• My preference is to price something (20-40%), even with prices less than costs. What’s your preference?

• How to get $4 Corn


HOW TO GET $4 CORN ‐workshop

3 hours long

Play a simulation game - try to get $4 corn

Meet some new friends

Interested in sponsoring a workshop for your customers?

Contact Edward Usset at [email protected]


Objective: Buy crop insurance to protect my production risk and price 75% of my anticipated corn crop (per APH yield) by late June.

Price 10,000 bushels at $3.75 cash price ($4.25 Dec. futures) using forward contract/futures hedge/HTA contractPrice 10,000 bushels at $4.05c/4.55f, or by March 29, pricing tool tbdPrice 10,000 bushels at $4.35c/4.85f, or by April 27, pricing tool tbdPrice 15,000 bushels at $4.65c/5.15f, or by May 26, pricing tool tbdPrice 10,000 bushels at $4.95c/5.45f, or by June 10, pricing tool tbdPrice 10,000 bushels at $5.25c/5.75f, or by June 24, pricing tool tbdPlan starts on January 1, 2021. Earlier sales may be made at a 40 cent premium and would be limited to 30,000 bushels.Ignore decision dates and make no sale if prices are lower than $3.75 local cash price/$4.25 December futures.Exit all options positions by mid-September 2021.

Corn 2021 Pre‐Harvest Marketing Plan

Can you start at something less than your minimum price?

Yes!


Why is an imperfect plan better than no plan at all?

• A plan is a benchmark for goals –it gives you something to adapt in a changing environment


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!

2020 Minnesota

Crop Insurance Conference

Five Common Mistakes in Grain Marketing · MGEX September Spring Wheat, 2000-2020 12 years (60%)...

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