Grain Marketing. Innovative. Responsive. Trusted.

Transcription

1 Grain Marketing Extension is a Division of the Institute of Agriculture and Natural Resources at the University of Nebraska Lincoln cooperating with the Counties and the United States Department of Agriculture. University of Nebraska Lincoln Extension educational programs abide with the nondiscrimination policies of the University of Nebraska Lincoln and the United States Department of Agriculture. Icons from Noun Project by Jordan Robert Husney Wira, Marcelo Lee, Maxim Kulikov, Kimmi Studio, Arthur Shlain, parkjisun, and Numero Uno.

2 Commodity prices are determined by the futures market. Photo from

3 Futures Markets An auction market in which participants buy and sell standardized future contracts Terms are set, except for price Multiple delivery months (and years) traded at once TERMINATION: The business day prior to the 15th calendar day of the contract month.

4 Futures Markets Soybeans(S) JAN 15 FEB 15 MAR 15 APR 15 MAY 15 JUN 15 JUL 15 AUG 15 SEP 15 OCT 15 NOV 15 DEC 15 JAN 15 FEB 15 MAR 15 APR 15 MAY 15 JUN 15 JUL 15 AUG 15 SEP 15 OCT 15 NOV 15 DEC 15 JAN 15 FEB 15 MAR 15 APR 15 MAY 15 JUN 15 JUL 15 AUG 15 SEP 15 OCT 15 NOV 15 DEC 15 Corn (C) & Winter Wheat(KW) January (F) 2019 March (H) 2019 May (K) 2019 July (N) 2019 August (Q) 2019 September (U) 2019 November (X) 2019 March (H) 2019 May (K) 2019 July (N) 2019 September (U) 2019 December (Z) 2019

5 Delivery Period Futures contracts specify delivery periods, usually the last 2 weeks for the contract. You will not be able to contract during the delivery period Elevators often roll to the next contract before or during the delivery period Grain buyers may have multiple delivery periods per contract

6 Elevators may charge a different basis for each delivery period/futures contract. Cash Price = Futures Price + Basis UNL Basis Data

7 From Frontier Cooperative 1/14/2019 for Mead, NE

8 Basis Basis represents: Transportation and handling costs to move product from current location to point of delivery Storage costs Expected supply & demand Cattle Supply & demand of transportation services Variations in grade Unavailability of substitutes Source: Johnson, J., T. Holman and M. Stockton. Historical Crop Prices, Seasonal Patterns and Futures Basis for the Nebraska Panhandle

9 2018 OLD Crop Corn Basis, Greenwood, NE Price ($/bu) $4.50 $4.30 $4.10 $3.90 $3.70 $3.50 $3.30 $3.10 $2.90 $2.70 $2.50 1/4/2018 1/25/2018 2/15/2018 3/8/2018 3/29/2018 4/19/2018 5/10/2018 5/31/2018 6/21/2018 7/12/2018 8/2/2018 8/23/2018 9/13/ /4/ /25/ /15/ /6/ /27/2018 CH18 CK18 CN18 CU18 CZ18 CH19 Futures Price Greenwood Cash Price

10 2018 OLD Crop Corn Basis, Greenwood, NE Price ($/bu) $4.1 $3.9 $3.7 $3.5 $3.3 1/4/2018 1/25/2018 2/15/2018 3/8/2018 3/29/2018 4/19/2018 5/10/2018 5/31/2018 6/21/2018 7/12/2018 8/2/2018 8/23/2018 9/13/ /4/ /25/ /15/ /6/ /27/2018 CH18 CK18 CN18 CU18 CZ18 CH19 Futures Price Greenwood Basis -$0.4 -$0.6 Basis ($/bu)

11 Futures Price and Basis Futures prices and basis typically move opposite of one another This relationship is not 1:1, i.e. a $0.01/bu. increase in futures price does not always equate to a $0.01/bu. decrease in basis However, in rare/extreme events like the 2012 drought they may trend together

12 Pre-Harvest and Post-harvest grain marketing plans can executed simultaneously Photo from

13 Pre-harvest marketing Sell during growing season, when prices are traditionally higher than harvest Corn & Soybeans - Plan should start around the end of January and run for 16 weeks Ed Usset, University of Minnesota Look at the new crop contract contract closest to expiration at harvest Dec (Z) for Corn Nov (X) for Soybeans Jul (N) for Winter Wheat

14 Dates: When are CORN prices highest? Pre-Harvest

15 Corn Trading Chart

16 Post-harvest marketing Sell after commodity is harvested Corn & soybeans should be priced by July 1 Before the August WASDE report Price grain using the nearby contract (the contract closest to expiration) OR deferred contracts In commercial storage be aware of differences in basis and storage when pricing on deferred contracts

17 Corn Trading Chart

18 NEARBY CONTRACT DEFERRED CONTRACTS From Frontier Cooperative 1/14/2019 for Mead, NE

19 OLD CROP 18 NEW CROP 19 NEW CROP 20 From Frontier Cooperative 1/14/2019 for Mead, NE

20 2018 OLD Crop Corn Basis, Greenwood, NE Price ($/bu) $4.1 $3.9 $3.7 $3.5 $3.3 1/4/2018 1/25/2018 2/15/2018 3/8/2018 3/29/2018 4/19/2018 5/10/2018 5/31/2018 6/21/2018 7/12/2018 8/2/2018 8/23/2018 9/13/ /4/ /25/ /15/ /6/ /27/2018 CH18 CK18 CN18 CU18 CZ18 CH19 Futures Price Greenwood Basis -$0.4 -$0.6 Basis ($/bu)

21 2018 New Crop Corn Basis, Greenwood, NE $4.4 $4.2 Price ($/bu) $4 $3.8 $3.6 $3.4 Provided by MidWest Farmers Cooperative 1/4/2018 1/25/2018 2/15/2018 3/8/2018 3/29/2018 4/19/2018 5/10/2018 5/31/2018 6/21/2018 7/12/2018 8/2/2018 8/23/2018 9/13/ /4/ /25/ /15/ /6/ /27/2018 -$0.4 -$0.6 Basis ($/bu) CZ18 Futures Price Greenwood New Crop Basis

22 Multiple contracts to watch. Photo from

23 Carrying Charge Carrying charge price difference between futures contract delivery months Future Contract Current Contract = Carrying Charge

24 Differences Between Contracts Small or negative carrying charge Negative also called Inverted Lower demand in the future Large carrying charge More demand in the future The carrying charge must be larger than your estimated storage costs for you to hold the product until the later date!

25 $0.11/bu From Frontier Cooperative 1/14/2019 for Mead, NE

26 When is the carrying charge big enough to profit from? 1 Carrying Charge= Future Contract Current Contract 2 Interest Cost = Current Contract Price X Interest Rate X # of months in storage/12 3 Carrying Charge/Interest Cost > 1.40, Sell the Carry

27 $0.11/bu 1 2 Carrying Charge= Future Contract Current Contract Interest Cost with a 6% rate= Current Contract Price X Interest Rate X # of months in storage/12 3 Carrying Charge/Interest Cost > 1.40, Sell the Carry From Frontier Cooperative 1/14/2019 for Mead, NE

28 ANSWER 1. $3.45-$3.34=$ $3.34 X 6% X 3 12 = $ = 2.196

29 On Farm Storage is Not Free Photo from

30 Estimating Storage Expense Know your commercial rate On-farm: You should account for variable expenses of on farm storage ISU on farm storage expense calculator m/crops/pdf/a2-33.pdf

31 Crop insurance s role in preharvest marketing Photo from

32 Revenue Protection Crop Insurance Pre-harvest price & revenue protection APH 182 bu./acre Crop Insurance Coverage Level 70% Price Always use harvest price to calculate indemnity payment If Harvest Price >Projected Price, recalculate Revenue Guarantee APH Yield X Coverage Level X Spring Price = Revenue Guarantee Projected Price February CZ Avg. $4.11/bu. $523.61/acre Harvest Price October CZ Avg. $4.00/bu. Guaranteed Revenue = $ /acre insurance premium 2018 prices, with 2017 Saunders County USDA NASS Yield for corn

33 Revenue Protection Crop Insurance Pre-harvest price & revenue protection INSURANCE Insured Amount Pre-Harvest Marketing Cash Forward Contract Yield 182 APH 182 APH % 70% 50% Price Guarantee Price 4.11 /bu. Contract Price $3.50/bu. INSURANCE Revenue to count Actual Production 50 bu. /acre Harvest Price $4.00/bu. Pre-Harvest Marketing Elevator Buyback 41 bu./acre Difference $0.50/bu. + $0.10 fee $523.61/acre $318.50/acre $200.00/acre - $24.60/acre Insurance Payment: $ $ = $323.61/acre Remaining After Buyback: $200 + $ $24.60 = $ prices, with 2017 Saunders County USDA NASS Yield for corn

34 Elevator Buyback Scenarios If contract price is less than current price, one could: buy back difference between contract price and current price plus fees Roll undeliverable contracts to next year If contract price is greater than current price Maybe get a check from the elevator for difference or percent of difference? Roll to next year Walk away (elevator gets 100% of gain)

35 How to Make an Action Plan that Works!! A grain marketing plan is a WRITTEN, proactive, strategic plan to sell your grain. Plans should consider: Cash flow needs Financial goals Storage capacity Farm logistics Risk appetite

36

37 Why a written plan An effective weapon against emotional sales & holds Everyone is on the same page Spouse Family members Business partner Bank Elevator

38 Marketing Plan Statements Sell # of bushels by date at futures price plus expected basis minus storage expense for delivery on date using marketing tool.

39 Example: North Platte, NE Pre-Harvest Plan Insured 500 acres, 150 APH, RP, 70% Level 75,000 X 0.70 = 52,500 Maximum Pre-price Estimated cost of production: $3.50 Expected harvest basis = -$0.50 Average price cash target = $3.50 Sell # of bushels by date at (futures price + expected harvest basis) for delivery at harvest using marketing contract. Price 10,000bu. before February 1 at $3.30 ($ $0.50) for delivery at harvest Price 10,000bu. before March 1 at $3.40 ($ $0.50) for delivery at harvest Price 10,000bu. before April 1 at $3.50 ($ $0.50) for delivery at harvest Price 10,000bu. before May 1 at $3.60 ($ $0.50) for delivery at harvest Price 10,000bu. before June 1 at $3.70 ($ $0.50) for delivery at harvest This example is provided for demonstration purposes only and is not intended to be used for specific grain marketing strategies. Past performance is not necessarily indicative of future results. Grain marketing involves risk, and you should fully understand those risks before pricing grain.

40 Marketing Plans Quantity Date Price Tool

41 Quantity: Break into multiple units S: Don t sell everything at once.* Expected production: 15,000 bu /5 sales goals = 3,000 bu. per sale *unless you have to or the price is too good to pass up Pre-harvest G: Never sell more than you have insured Expected production: 150bu APH X 100 acres = 15,000 bu Pre-harvest market: 15,000bu X 70% coverage = 10, 500 bu Post-harvest G: Only sell grain in the bin

42 Dates: Post-Harvest G: Meet cash flow needs & beat harvest price Avoid the call method of marketing! S: Have corn and soybeans priced by the release of the August WASDE report. S: Don t sell everything at once.* *unless you have to or the price is too good to pass up

43 Dates: When are prices highest? Post- Harvest: Look at the nearby contract contract closest to expiration Seasonal Price Patterns Harvest Low Spring Rally

44 Dates: Pre-harvest G: Sell during growing season, when prices are traditionally higher. G: Price grain above breakeven, or at market highs. S: Have corn and soybeans priced by the release of the August WASDE report.

45 Dates: Pre-Harvest Marketing Statement Sell # of bushels by date at futures price plus expected basis at harvest using marketing tool.

46 Price Goals How much can this crop contribute to your income this year? What is a realistic price goal? Market Outlook Marketing Service USDA WASDE (Dec. 2018) Corn $ $3.95 Wheat $ $5.25 Soybeans $ $9.35

47 Price Goals Know your cost of production Establish your own breakeven UNL Crop Budgets budgets Bank cash flows

48 Price Goals Establish an average target price you are willing to sell at Average CASH Target $3.50 Sell equal units at: $3.30, $3.40, $3.50, $3.60, $3.70 Cash price = futures + basis

49 Tools: What to use, when Futures Increasing Basis Strengthening A. Store unpriced B. Delayed price contract Long hedge Buy call option E. HTA F. Short hedge G. Buy put option C. Basis contract Cash sale & long futures Cash sale & buy call option D. Minimum price contract 1 2 H. Cash sale I. Cash forward contract J. Basis contract & short hedge K. Basis contract & buy put option 3 4 Basis Weakening Futures Decreasing

50 Tools - Apps These apps are owned and operated by the stated companies. This is not an endorsement of their product, but an informational display of tools out on the market