Leesport, PA (Lancaster Farming, December 7, 2013): Many grain farmers are focused on chasing the highest price, but that strategy can lead to reactive moves based more on emotion than planning.
Focusing instead on avoiding common marketing mistakes can help farmers get a good average price for their grain, said Edward Usset, a University of Minnesota grain marketing specialist. Usset spoke Tuesday at the Penn State Extension Grain Marketing Seminar at the Berks County Agricultural Center. "Great marketing is not finding the high price. It's finding an extra 10-20 cents per bushel with a solid plan that eliminates mistakes," he said.
That extra income can mean a 33-50 percent increase in income because the average farmer makes a 20- to 30-cent profit per bushel, including government payments. The benchmark for effective marketing strategies should be the off-the-combine price. "If we can't beat the harvest price, why bother?" Usset said.
Farmers make a mistake when they are reluctant to price grain before harvest. December corn futures have fallen from May, near planting time, to October, harvest time, in 18 of the past 24 years. "I can't find a seasonal (trend) this strong anywhere except for December corn," Usset said.
Corn futures prices tend to be highest in the spring and weaker at harvest. Usset defined a strategy in which a farmer, "Terry Timer," priced 25 percent of the year's crop in March, in April and in May, for a total of 75 percent priced before harvest.
She only prices when corn is at or above her break-even price.
"There have been years, and this may be one of them coming up, where Terry's kept her hands in her pockets all spring," Usset said. "Don't do (pre-harvest sales) just because of (trends). It's got to be a price that works for your farm."
The seasonal trends are not as strong for November soybeans.
That market has fallen from planting to harvest in 15 of the 24 years since 1990. Since 2000, the market has declined in seven years and improved in seven years. Usset removed 2001 and 2002 because the prices in those years were below her break-even price, leaving only five years when the market improved.
Her corn price averaged 14 cents better and equaled or beat the harvest price in 18 of the past 24 years, including four years when she sold no pre-harvest corn because of prices below break-even.
The strategy worked in 16 of 24 years for soybeans, with an average advantage of 8 cents.
Pre-harvest pricing has its advantages, but farmers also need to be smart about post-harvest pricing. They need to know when to let go of their grain.
Usset told of a Northern Plains farmer who had 40,000 bushels of durum wheat during an extremely bad period for durum.
The elevator manager offered him an incredible $24.50 per bushel, but the man demanded $25 per bushel, which would have given him a million-dollar check.
The elevator manger refused, and the farmer sold his grain six months later for $8 per bushel.
"What are you waiting for? Oh, a higher price,' " Usset said. "We have a moving target, and I can't deal with that."
Usset used the character May Sellers as an example of an organized exit strategy. Sellers keeps 80 percent of her crop in on-farm storage until the last week of May, when she sells it.
Usset accounts for handling loss, shrinkage and interest, though he admitted it may be unrealistic to haul 80 percent of a harvest to the elevator in the short time he allows.
Corn prices tend to rise 10-15 percent from the October harvest to the next May, and Sellers takes advantage of that increase.
The local cash price is the sum of the futures price plus basis. "The futures price after harvest is a coin flip" in the corn market, Usset said.
If the cash price increases and futures are unpredictable, an increase in basis is what drives the cash price higher after harvest, he said.
Soybeans are quite a different story, as July futures have improved after harvest in 17 of the past 24 years. This trend has unexpectedly gotten more pronounced despite stronger competition with South America, which harvests soybeans when U.S. farmers are planting.
Sellers' strategy has beaten the corn harvest price in 15 of the past 23 years. The average advantage was 22 cents. The strategy was even more successful in soybeans, netting an average 52 cents per bushel above the harvest price, and paying off in 17 of the past 23 years.
Sellers uses a timing-driven exit strategy, selling all stored grain at the end of May. Other timing-driven exits include selling when the price changes from up to down or selling a truck a week over a 10-week period, Usset said.
Usset also offered price-driven exit strategies, such as selling all the grain when the price hits a certain threshold above — or to stop a loss, below — the harvest price.
Usset said that holding on too long, meanwhile, violates the so-called 11th commandment of grain marketing: "Thou shall not hold unpriced corn or soybeans in the bin beyond July 1."
Usset's character Hank Holder is always hoping for a better price and ends up having to sell the previous year's crop just before the next harvest to free up space in the bins.
There is a "distinct increase in truck traffic" in late August in his part of Minnesota as farmers do just that, Usset said.
The Holder price is the following harvest price minus storage costs.
Holder's strategy is similar to Sellers'. "It's just that May knows when to get off the bus," Usset said.
Basis and futures tend to fall from spring to autumn, so Hank's belated exit strategy ends up cutting his profits considerably.
The cash price for corn in southwest Minnesota dropped by half from the start of July to harvest in 2008, and by nearly 40 percent this year.
"I'll grant you there's nothing special about July 1," but it works as an approximate date for when basis and futures might fall, Usset said.
The Hank Holder strategy beat the harvest price only eight of the past 23 years in corn, losing an average of 22 cents. In soybeans, it succeeded only seven of 23 times, forfeiting an average of 34 cents per bushel.
Holding corn into the next crop has paid off by at least 15 cents only four years since 1990 in Minnesota, Usset said.
In any case, farmers should avoid a situation Usset encountered in 1985 as a grain buyer for flour mills. He found buyers on the market floor gathered around an excellent sample of hard red spring wheat.
"That is the 1975 crop. It just came to market now," the buyers told him.
A marketing plan that minimizes mistakes will show a commitment to pre-harvest marketing, as long as prices are favorable; a commitment to have all grain priced by July 1; and a plan for getting out of the market, Usset said.