A farmer asks, "For 2011 crop corn and soybeans, we have some of it sold at lower prices than are available now (early December). I think we should sell up to the crop insurance bushel guarantee of 135 bushels per acre for corn and 40 bushels per acre for beans. Our average gross dollars will cover all of our inputs, including my wages, depreciation, all costs and add a small profit.
"We normally raise 190 bushel per acre corn and 60-plus bushel per acre soybeans, although our average production history or APH yield isn't this high. My thinking is to lock in dollars to cover all expenses, as all inputs are paid for. No one knows when or at what price the top will be. Usually when the price starts to move down, it takes no prisoners. I'll try to raise as big a crop as I possibly can and make more sales as I see our crop developing during the 2011 growing season and hopefully at higher prices—if they continue to go up.
"I'm not much for futures market trading—I've been there, done that, and didn't like margin calls. Options are sensitive to timing. We use cash sales with "No-basis-established" contracts. What do you think of our marketing strategy for the 2011 crop?"
He suggests the farmer use scale-up selling for 2011 crop
Steve Johnson, an Iowa State University Extension farm management specialist, agrees with this farmer's strategy of making additional 2011 crop sales, but suggests scale-up selling using hedge-to-arrive, or HTA, contracts. "You've already locked in your 2011 input costs," says Johnson. "Maybe you could break the 2011 expected bushels into increments of eight or 10 sales, rather than just one sale. No one knows how high futures prices will move."
The ethanol industry is sensitive to the fact that the 45 cent per gallon blenders' tax credit from the federal government is scheduled to expire December 31, 2010, notes Johnson. Beware of the financial condition of your grain buyer, especially if you're delivering corn directly to an ethanol plant.
Also, use caution in committing more bushels to delivery than are covered by 2011 Revenue Protection or RP crop insurance. RP is the new crop insurance product that replaces CRC and RA/HPO (Crop Revenue Coverage and Revenue Assurance/Harvest Price Option) beginning with the 2011 crop. Johnson suggests you consider buying a hail policy for coverage in addition, as the traditional crop insurance leaves a large deductible, especially if you are using enterprise units. In this case, the farmer has recognized his bushel guarantee as 135 bushels per acre for corn and 40 bushels per acre for soybeans.
With the higher cost to produce a crop in 2011, risk management will be more important than ever, he adds. Capturing the 2011 crop margin using available tools is critical as opposed to trying to outguess the market price and the other unpredictable factors that can influence prices.
Also, consider using "options" as a crop pricing tool
"While you may consider using options as being sensitive to timing, in the age of futures price volatility, the use of options should not be ignored," says Johnson. "Yes, premiums will be extremely high right now, but you're nearly one year until expiration so you're paying a lot of time value."
Johnson suggests the farmer consider using option "puts" next spring and summer (lower premiums due to time value) to put a floor under prices without committing additional bushels to delivery. This would work for additional bushels the farmer plans to grow in 2011 but aren't covered by crop insurance revenue guarantees. In this example, you're only protecting price on about 65% to 70% of expected production. Options strategies can be added and not commit to delivery of additional bushels, he explains.
"If you have concerns that we could see significantly higher 2011 futures prices, you should look at buying 'out-of-the-money' calls maybe this winter with a setback in 2011 futures prices," says Johnson. "There was a unique opportunity early this past summer to use call options and benefit from the late summer and fall futures price rally. Granted, the potential is great that a 2011 December call option purchased in late winter will expire worthless, but it might give you more comfort to sleep at night next spring and summer."