How to write a Post harvest marketing plan...2018/02/18 · How to Write a Post-Harvest Marketing...
Transcript of How to write a Post harvest marketing plan...2018/02/18 · How to Write a Post-Harvest Marketing...
How to Write a Post-Harvest Marketing Plan
Edward Usset, Grain Marketing Economist
University of Minnesota
Columnist, Corn & Soybean Digest
www.cffm.umn.edu
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
Post-harvest marketing is different!
Pre-harvest marketing is strategic
• A plan is forward looking and may be written up to two years prior to harvest
• Production costs establish minimum price objectives
• Seasonal patterns point to AMJ as a good time for action
Post-harvest marketing is tactical
• A plan is written at harvest, based on basis and carrying charges
• Production costs are not considered in the plan
• Seasonal patterns point to AMJ as a good time for action
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
How to write a post-harvest marketing plan
1. Post-harvest marketing choices
2. What would Earl do?
3. Write a post-harvest marketing plan
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
How to write a post-harvest marketing plan
1. Post-harvest marketing choices
2. What would Earl do?
3. Write a post-harvest marketing plan
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
Objective: Seek strategies that balance risk and reward in the current market environment. Hold no un-priced grain beyond July 1.
Harvest: Price and deliver ___________ bushels (no storage), and ___________ more bushels (good price)
Re-own __________ bushels with an options strategy tbd
Store ___________ bushels of unpriced grain for later saleSell _______ bushels when the cash price reaches $_______ or by ________ Sell _______ bushels when the cash price reaches $_______ or by ________Sell _______ bushels when the cash price reaches $_______ or by ________Bushels not priced by __________ will be sold _____________________Sell if the price falls below $___________________
Store and sell the carry on ___________ bushels with a pricing tool tbd Lock the basis on ________ bushels at ____ cents under the ______ contract, or by ____________ at the current basis
Post-Harvest Corn Marketing Plan
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
Post-harvest marketing choices…
Sell grain at harvest
Hold grain in storage to sell later
Hold grain in storage and “sell the carry”
How do I make a choice?
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
How to write a post-harvest marketing plan
1. Post-harvest marketing choices
2. What would Earl do?
3. Write a post-harvest marketing plan
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
Earl Eitheror
Earl has on-farm storage. At harvest he makes an “either/or” choice. When carrying charges are large, he chooses to store grain and “sell the carry.” When carrying charges are small, he chooses to store his grain unpriced, for sale in the spring.
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
Decision Tree for Sizing Up the Market
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
Earl Eitheror
Earl has on-farm storage. At harvest he makes an “either/or” choice. When carrying charges are large, he chooses to store grain and “sell the carry.”When carrying charges are small, he chooses to store his grain unpriced, for sale in the spring.
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
Carrying Charges
Large crops/large free stocks = large carrying charges
•In the bear market environment, Earl plays it safe by selling the carry.
•Carrying charges will not get larger than the commercial cost of storing grain
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
How Does Earl “Sell the Carry”?
In the bear market environment, Earl plays it safe by selling the carry.
He has three tools to “sell the carry.”
• Forward contract (when the basis is good)
• Hedge-to-arrive (when basis is poor)
• Sell futures (when basis is poor and you want maximum flexibility)
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
Dec. $3.53
Mar. $3.67
May $3.75
Jul. $3.83
CBOT corn futures: October 13, 2017
Carrying Charges
Large carrying charges are an incentive to
store today and sell tomorrow; hedging
risk and capturing a return to storage.
Three tools to sell the carry
• Forward contract
• Hedge-to-arrive
• Sell futures
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
Dec. $3.53
Mar. $3.67
May $3.75
Jul. $3.83
CBOT corn futures and Pipestone, MN cash market: October 13, 2017
Carrying Charges
$2.86 1.At harvest, place the crop in storage, current basis is 67 cents under the Dec, or 97 cents under the July contract
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
Dec. $3.53
Mar. $3.67
May $3.75
Jul. $3.83
CBOT corn futures and Pipestone, MN cash market: October 13, 2017
Carrying Charges
$2.86 1.At harvest, place the crop in storage, current basis is 67 cents under the Dec, or 97 cents under the July contract
2. Sell the carry, selling July futures (or HTA)
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
Dec. $3.53
Mar. $3.67
May $3.75
Jul. $3.83
CBOT corn futures and Pipestone, MN cash market: October 13, 2017
Carrying Charges
$2.86 1.At harvest, place the crop in storage, current basis is 67 cents under the Dec, or 97 cents under the July contract
2. Sell the carry, selling July futures (or HTA)
3. What’s your expected basis in May or June?
40 under?
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
Dec. $3.53
Mar. $3.67
May $3.75
Jul. $3.83
CBOT corn futures and Pipestone, MN cash market: October 13, 2017
Carrying Charges
$2.86 1.At harvest, place the crop in storage, current basis is 67 cents under the Dec, or 97 cents under the July contract
2. Sell the carry, selling July futures (or HTA)
3. What’s your expected basis in May or June?
4. Your final price depends on the actual basis; 40 under will result in a final price of $3.43
$3.43
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
Earl Eitheror
Earl has on-farm storage. At harvest he makes an “either/or” choice. When carrying charges are large, he chooses to store grain and “sell the carry.” When carrying charges are small, he chooses to store his grain unpriced, for sale in the spring.
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
Nov. $15.60
Mar. $15.30
May $14.89
Jul. $14.69
CBOT Soybean Futures, October 1, 2012
Aug. $14.43
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!".
Carrying Charges
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
Nov. $15.60
Mar. $15.30
May $14.89
Jul. $14.69
CBOT Soybean Futures, October 1, 2012
Aug. $14.43
Store grain today and…
…sell tomorrow?
Carrying Charges
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
Carrying Charges
Small crops/tight stocks = small carrying charges or inverses
•In the bull market environment, Earl takes a chance with unpriced grain.
•There is no limit to the size of an inverse (see corn in 1996, soybeans in 2004, wheat in 2008)
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
based on Iowa corn prices received by farmers
In the bull market environment, Earl takes a chance with unpriced grain.
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
Earl Eitheror
Earl bases his choice on carrying charges.
Does it work?
Let’s compare Earl to Barney Binless
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
Barney Binless
Barney has no on-farm storage, so he sells his crop off the combine, taking the harvest price every year.
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
Earl BarneyEarl’s
advantage> / = to Barney
Corn 2.92 2.78 0.14 22/27 years
Soybeans 7.56 6.95 0.61 18/27 years
HRS Wheat 4.69 4.54 0.15 21/27 years
Earl vs. Barney, 1990-2016
• Barney Binless represents the harvest price.• Due to storage limitations, Earl sells 20% of his grain at harvest, and this
sale is part of his average price.• Earl’s results are net of on-farm storage costs.
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
Earl vs. Barney, 1990-2016
• Over time, Earl’s choice paid-off vs. the harvest price, net of on-farm storage costs
• His results are consistent for corn, soybeans and wheat
• Earl’s choice does not work every time (nothing is 100%)
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
How to write a post-harvest marketing plan
1. Post-harvest marketing choices
2. What would Earl do?
3. Write a post-harvest marketing plan
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
Is basis high or low?
Are market prices high or low?
What are my storage costs?
What is my appetite for risk?
1. Use the decision tree and plan template
2. Ask; What is the carry in the market? (i.e. What would Earl do?)
3. Refine your plan…
Writing a post-harvest marketing plan
4. Don’t forget your exit plan!
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
Decision Tree for Sizing Up the Market
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
Objective: Seek strategies that balance risk and reward in the current market environment. Hold no un-priced grain beyond July 1.
Harvest: Price and deliver ___________ bushels (no storage), and ___________ more bushels (good price)
Re-own __________ bushels with an options strategy tbd
Store ___________ bushels of unpriced grain for later saleSell _______ bushels when the cash price reaches $_______ or by ________ Sell _______ bushels when the cash price reaches $_______ or by ________Sell _______ bushels when the cash price reaches $_______ or by ________Bushels not priced by __________ will be sold _____________________Sell if the price falls below $___________________
Store and sell the carry on ___________ bushels with a pricing tool tbd Lock the basis on ________ bushels at ____ cents under the ______ contract, or by ____________ at the current basis
Post-Harvest Corn Marketing Plan
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
Sizing Up the Market
The situation at harvest (2017)…
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
2017 Post-Harvest Marketing Plans
Southwest MN
Mid-October
Dec‘17 futures $3.53
basis 67 under
harvest price $2.86
Jul‘18 futures $3.83
Corn
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
Decision Tree for Sizing Up the Market
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
Sizing up the 2017 corn market
Earl has a carry to sell
Basis is poor and should be modestly better by spring
Diversify with some unpriced corn in storage
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
Objective: Get a good average price! Hold no unpriced corn beyond July 1, 2018.
20,000 bushels: Most priced earlier with Dec’17 sales -sell at harvest.
30,000 bushels: Place corn in storage and wait for higher prices. Exit plan: Sell 10,000 bushels @ $3.40, 10K @ $3.50 and 10K @ $3.60. Sell if the cash price falls below $2.65. Bushels unsold at the end of April will be sold in equal increments in May and June.
30,000 bushels: Place corn in storage and sell the carry with July futures. Exit plan: Unwind the hedge when the basis reaches 40 under the July, or by June 20.
Corn: 2017 Post-Harvest Marketing Plan
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
2017 Post-Harvest Marketing Plans
Southwest MN
Mid-October
Nov‘17 futures $10.02
basis 94 under
harvest price $9.08
Jul‘18 futures $10.36
Soybeans
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
Decision Tree for Sizing Up the Market
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
The soybean market has a small carry
Basis is poor but should improve some – sell a small carry?
Hope for the best with unpriced soybeans in storage
Sizing up the 2017 soybean market
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
Does it ever make sense to sell a small carry?
The benefit of selling a small carry…
• hedge against lower prices
• allow for basis improvement
• defer taxes to a new year
More ways to find the dime!
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
Soybeans: 2017 Post-Harvest Marketing Plan
Objective: Get a good average price! Hold no unpriced soybeans beyond July 1, 2018.
5,000 bushels: Price earlier with sales of Nov’17 futures: deliver at harvest.
15,000 bushels (half priced earlier with Nov’17 sales): Place in storage and roll the hedge forward to July. Exit plan: Unwind the hedge when the basis reaches 60 under the July, or by June 20.
5,000 bushels: Place in storage and hold for higher prices. Exit plan: Sell 2,500 bushels @ $9.20 and 2,500 bushels @ $9.50. Sell if the cash price falls below $7.80. Bushels unsold at the end of April will be sold in equal increments in May and June.
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
Peter Paperfarmer says…
“If I sell cash grain, or sell the carry at harvest and not re-own with call options, I’ve lost my upside potential!”
My response? Look ahead with a 2018 pre-harvest marketing plan (and your upside potential didn’t cost a penny).
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
Pre and post harvest marketing work together!
or
How to get $4 corn
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
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 30, pricing tool tbdPrice 15,000 bushels at $4.65c/5.15f, or by May 29, pricing tool tbdPrice 10,000 bushels at $4.95c/5.45f, or by June 13, pricing tool tbd Price 10,000 bushels at $5.25c/5.75f, or by June 27, pricing tool tbd
Plan starts on January 1, 2018. 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 2018.
Corn 2018 Pre-Harvest Marketing Plan
Dec’18 @ $3.84
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
How to get $4 corn*
$4.10 sale of Dec’18 corn futures
-0.50 harvest basis
$3.60 harvest price
+0.25 positive carry from Dec to July
+0.15 basis improvement (-35N vs -50Z)
$4.00 corn!
*assumes a normal harvest basis of 50 cents under December futures, and a spring basis of 35 cents under the July futures.
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
How to get $4 corn*
$4.10 sale of Dec’18 corn futures
-0.50 harvest basis
$3.60 harvest price
1. sell
*assumes a normal harvest basis of 50 cents under December futures, and a spring basis of 35 cents under the July futures.
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
year Dec high date
2017 4.15 July 10
2016 4.48 June 17
2015 4.37 July 2
2014 5.13 April 8
2013 5.94 February 4
How to get $4 corn*
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
How to get $4 corn*
$4.10 sale of Dec’18 corn futures
-0.50 harvest basis
$3.60 harvest price
+0.25 positive carry from Dec to July
1. sell
2. roll
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
Dec. $3.53
Mar. $3.67
May $3.75
Jul. $3.83
CBOT corn futures: October 13, 2017
Rolling the hedge?
buy back Dec futures and…
…sell July futures
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
year Dec/Jul carry (cents/bu)
2017 27
2016 29
2015 23
2014 22
2013 30
How to get $4 corn*
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
How to get $4 corn*
$4.10 sale of Dec’18 corn futures
-0.50 harvest basis
$3.60 harvest price
+0.25 positive carry from Dec to July
+0.15 basis improvement (-35N vs -50Z)
$4.00 corn!
1. sell
2. roll
3. b
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
year basis date
2018 ?? ??
2017 -50 May 17
2016 -47 Jun 16
2015 -32 Jun 15
2014 -50 May 15
How to get $4 corn*
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
$4.10 sale of Dec’18 corn futures
-0.50 harvest basis
$3.60 harvest price
+0.25 positive carry, Dec’18/Jul’19
+0.15 basis improvement (-35N)
$4.00 corn!
*assumes a normal harvest basis of 50 cents under December futures, and a spring basis of 35 cents under the July futures.
1. sell
2. roll
3. b
4. sell
How to get $4 corn*
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
cropCash price opportunity harvest
price*
2017 $4.00 $2.80-2.90
2016 $4.00+ $2.80-2.95
2015 $4.00+ $3.25-3.30
2014 $4.50+ $2.90-3.25
2013 $5.00+ $3.95-4.05* SW MN
Review the opportunity…
How to get $4 corn*
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
Review the risks…
1.No sale of Dec’18 futures at $4.10+ (currently trading at $3.90)
2.The Dec/July carry less than 25 cents
3.Basis risk
How to get $4 corn*
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
Earl shows us that an approach that
works over time is not a guarantee
that it will work every time.
Marketing is not easy!
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
Why is an imperfect plan better than no plan at all?
• A plan is a benchmark for goals, and it gives you something to adapt in a changing environment.
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
Quiz Time!
My students speak!
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
Quiz Time!
“Professor Usset is a fantastic
teacher. He really cares about his students and is passionate about the subject.”
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
Quiz Time!
“Edward is a great teacher! If he
could make the final exam easier, the class would be perfect.”
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
Quiz Time!
“You are one of the best teachers I ever met in my college life.
Come and party with me.”
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
Quiz Time!
“The instructor was rather
scatter-brained and confused about the content.”
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
Post harvest choices are few Sell grain at harvest
Hold grain in storage to sell later
Hold grain in storage and “sell the carry”
What would Earl do? Carrying charges are critical to the storage decision
Refine your plan… Are basis or prices high or low? What is my appetite for risk?
Get an exit plan!
Review
Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.
How to Write a Post-Harvest Marketing Plan
Thank you!