How to Write a Pre-Harvest Marketing Plan

Transcription

1 How to Write a Pre-Harvest Marketing Plan Edward Usset, Grain Marketing Economist University of Minnesota Columnist, Corn & Soybean Digest usset001@umn.edu

2 Three slides that explain the big picture

3 million bushels 6,000 U.S. Corn Use for Ethanol Production, ,000 4,000 3,000 2,000 1,000 0

4 million bushels 3,500 Chinese Soybean Imports, ,000 2,500 2,000 1,500 1,

5 million metric tonnes 70 Wheat Exports, Kazakhstan Russia Ukraine U.S. and Canada

6 Corn 2018 Pre-Harvest Marketing Plan 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 contract Price 10,000 bushels at $4.05c/4.55f, or by March 29, pricing tool tbd Price 10,000 bushels at $4.35c/4.85f, or by April 30, pricing tool tbd Price 15,000 bushels at $4.65c/5.15f, or by May 29, pricing tool tbd Price 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, 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 (1) Pricing targets (2) Decision dates (3) Pricing tools & trump cards

7 Corn 2018 Pre-Harvest Marketing Plan 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 contract Price 10,000 bushels at $4.05c/4.55f, or by March 29, pricing tool tbd Price 10,000 bushels at $4.35c/4.85f, or by April 30, pricing tool tbd Price 15,000 bushels at $4.65c/5.15f, or by May 29, pricing tool tbd Price 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, 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 (1) Pricing targets

8 Corn 2018 Pre-Harvest Marketing Plan 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 contract Price 10,000 bushels at $4.05c/4.55f, or by March 29, pricing tool tbd Price 10,000 bushels at $4.35c/4.85f, or by April 30, pricing tool tbd Price 15,000 bushels at $4.65c/5.15f, or by May 29, pricing tool tbd Price 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, 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 I have minimum price objectives!

9 Pricing Targets Choose your minimum * price threshold Cost of production (pre-harvest only) Focus on local costs, not your costs See appendix for detailed costs of production * Your most important choice in developing a pre-harvest marketing plan!

10 Cost of Production - Corn FINBIN Southern MN Average, Cash Rent ($/bushel) 2016 actual $ estimated $ projected $3.75 The break even price to cover all costs, net of government payments, including a return to labor & management

11 $/bushel Cost of Production - Corn FINBIN Southern MN average, cash rent acres $5.00 $ $4.00 $ $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $ est pro.

12 Cost of Production - Soybeans FINBIN Southern MN Average, Cash Rent ($/bushel) 2016 actual $ estimated $ projected $8.90 The break even price to cover all costs, net of government payments, including a return to labor & management

13 $/bushel Cost of Production - Soybeans FINBIN Southern MN average, cash rent acres $ $ $ $6.00 $4.00 $2.00 $ est pro.

14 Cost of Production HRS Wheat FINBIN Northwestern MN Average, Cash Rent ($/bushel) 2016 actual $ estimated $ projected $5.50 The break even price to cover all costs, net of government payments, including a return to labor & management

15 $/bushel Cost of Production HRS Wheat FINBIN Northwestern MN average, cash rent acres $ $7.00 $6.00 $ $4.00 $3.00 $2.00 $1.00 $ est fore.

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17 Pricing Targets Choose your maximum * price target This plan starts at $4.25 Dec corn and works up to $5.75 Dec Min and max price targets form bookends for all other price targets What is a realistic maximum price objective? * Your least important choice in developing a pre-harvest marketing plan.

18 Pricing Targets Chicago December Corn Futures, Contract Years with the Greatest Price Rise from Jan 1 forward Jan 1 price Highest price (Jan 1 to exp.) Highest price vs. Jan 1 Dec 08 $4.80 $ % Dec 12 $5.90 $ % Dec 11 $5.53 $ % average 48%

19 Pricing Targets Chicago November Soybean Futures, Contract Years with the Greatest Price Rise from Jan 1 forward Jan 1 price Highest price (Jan 1 to exp.) Highest price vs. Jan 1 Nov 12 $12.19 $ % Nov 08 $11.48 $ % Nov 07 $7.26 $ % average 45%

20 Pricing Targets Minneapolis September Wheat Futures, Contract Years with the Greatest Price Rise from January 1 forward Jan 1 price Highest price (Jan 1 to exp.) Highest price vs. Jan 1 Sep 08 $8.67 $ % Sep 07 $5.06 $ % Sep 12 $7.99 $ % average 48%

21 Pricing Targets A process to set minimum and maximum price targets Select a minimum price threshold based on local production costs Add an amount in line with a figure from the previous table to create a maximum price. Use judgment to adjust this figure You now have min and max price targets to bookend all other price objectives

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23 Corn 2018 Pre-Harvest Marketing (2) Decision Plandates 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 contract Price 10,000 bushels at $4.05c/4.55f, or by March 29, pricing tool tbd Price 10,000 bushels at $4.35c/4.85f, or by April 30, pricing tool tbd Price 15,000 bushels at $4.65c/5.15f, or by May 29, pricing tool tbd Price 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, 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.

24 Decision Dates If I reach a decision date before a price target is reached, I price the grain. * Decision dates are needed to make it a real plan for action Crop insurance and/or options allow us to forward price with confidence What s so special about the March to May period in pre-harvest pricing? * As long as the price is above my minimum threshold!

25 Corn 2018 Pre-Harvest Marketing Plan Objective: Buy crop insurance to protect my production risk and price 75% of my anticipated corn crop (per APH yield) by late June. Why March-June? Price 10,000 bushels at $3.75 cash price ($4.25 Dec. futures) using forward contract/futures hedge/hta contract Price 10,000 bushels at $4.05c/4.55f, or by March 29, pricing tool tbd Price 10,000 bushels at $4.35c/4.85f, or by April 30, pricing tool tbd Price 15,000 bushels at $4.65c/5.15f, or by May 29, pricing tool tbd Price 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, 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.

26 01-Oct Price Index (January 1 = 100) 01-Dec 01-Oct 01-Dec 01-Nov 01-Nov 01-Jan 01-Aug 01-Sep 01-Feb 01-Jul 01-Mar 01-Apr 01-May 01-Jun Chicago December Corn Futures, average Don t forget to sell something! But remember your minimum price. 92 approximate dates

27 01-Oct 01-Nov 01-Dec 01-Jan 01-Feb Index (January 1 = 100) 01-Oct 01-Mar 01-Apr 01-Nov 01-May 01-Aug 01-Jun 01-Sep 01-Jul 110 Chicago November Soybean Futures, Don t forget to sell something! approximate dates Omitting years <minimum in May (2001 & 2002) But remember your minimum price

28 Price Index (January 1 = 100) 01-Oct 01-Nov 01-Dec 01-Jan 01-Aug 01-Jul 01-Sep 01-Feb 01-Mar 01-Apr 01-May 01-Jun September MGEX Spring Wheat Futures, Don t forget to sell something! Years when May 1 price is higher than production costs (excludes ,05,10,15,16) approximate dates

29 Corn 2018 Pre-Harvest Marketing Plan 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 contract Price 10,000 bushels at $4.05c/4.55f, or by March 29, pricing tool tbd Price 10,000 bushels at $4.35c/4.85f, or by April 30, pricing tool tbd Price 15,000 bushels at $4.65c/5.15f, or by May 29, pricing tool tbd Price 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, 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 (3) Pricing tools & trump cards

30 Pricing Tools tbd to be determined Fixed-price tools Forward contract Sell futures Futures fixed (HTA) Minimum-price tools Forward contract and buy a call option Buy a put option Technical tools Moving averages, etc.

31 Pricing Tools Fixed-price tools +Final price is known (or nearly known) No upside potential if prices go higher Minimum-price tools +Upside potential High cost makes it difficult to use in early sales (which are likely lower price sales)

32 Pricing Tools In general, I prefer to o Use simple, low-cost tools to price grain early in the plan (i.e. fixed-price tools) Forward contracts, futures contracts, HTAs o Save options and/or technical tools for the later stages of the plan Lowers the cost (i.e. time value) of options Trends are more likely in summer months

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34 2012

35 2013

36 Quiz Time! How long is the American Birkebeiner? a) 13 kilometers b) 27k c) 33k d) 55K

37 Beer chaser

38 My 2018 Pre-Harvest Marketing Plans

39 Corn 2018 Pre-Harvest Marketing Plan 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 contract Price 10,000 bushels at $4.05c/4.55f, or by March 29, pricing tool tbd Price 10,000 bushels at $4.35c/4.85f, or by April 30, pricing tool tbd Price 15,000 bushels at $4.65c/5.15f, or by May 29, pricing tool tbd Price 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, 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 Dec $3.83

40 Soybeans 2018 Pre-Harvest Marketing Plan 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 contract Price 5,000 bushels at $9.75c/10.50f, or April 30, pricing tool tbd Price 2,500 bushels at $10.50c/11.25f, or by May 29, pricing tool tbd Price 5,000 bushels at $11.25c/12.00f, or by June 27, pricing tool tbd Plan starts on January 1, 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 Nov $9.76

41 Spring Wheat 2018 Pre-Harvest Marketing Plan Objective: Buy crop insurance to protect my production risk and price 75% of my anticipated wheat crop (per APH yield) by mid June. Price 5,000 bushels at $5.50 cash price/$6.00 Sep wheat futures using forward contract/hta contract/sell futures Price 5,000 bushels at $6.00c/$6.50f, or by March 29, pricing tool tbd Price 5,000 bushels at $6.50c/$7.00f, or by April 30, pricing tool tbd Price 2,500 bushels at $7.00c/$7.50f, or by May 29, pricing tool tbd Price my last 5,000 at $7.50c/$8.00f, or by June 27, pricing tool tbd Plan starts on November 1, Earlier sales may be made at a 50 cent premium and would be limited to 15,000 bushels. I will consider the December futures contract for new crop sales at a 15 cent premium to September. Ignore decision dates and make no sale if prices are lower than $5.50 local cash price/$6.00 September futures. Sep $6.27

42 Thoughts on pricing grain below production costs Sometimes we maximize profits, and sometimes we minimize losses My preference is to price something (20-40% of expected production), even with prices less than costs What is your preference?

43 Pre-Harvest Marketing Plan for Corn Objective: Buy crop insurance to protect my production risk and have % of my anticipated corn crop (based on APH yield) priced by. Price bushels at $ cash price ($ December futures) using Price bushels at $ c/ f, or by, using Price bushels at $ c/ f, or by, using Price bushels at $ c/ f, or by, using Price bushels at $ c/ f, or by, using Price bushels at $ c/ f, or by, using Price bushels at $ c/ f, or by, using Plan starts on. Earlier sales may be made at a cent premium to price targets noted above, and limited to bushels. Ignore decision dates and make no sale if prices are lower than $ local cash price/$ December futures.

44 Pre-Harvest Marketing Plan for Soybeans Objective: Buy crop insurance to protect my production risk and have % of my anticipated soybean crop (based on APH yield) priced by. Price bushels at $ cash price ($ Nov futures) using Price bushels at $ c/ f, or by, using Price bushels at $ c/ f, or by, using Price bushels at $ c/ f, or by, using Price bushels at $ c/ f, or by, using Price bushels at $ c/ f, or by, using Price bushels at $ c/ f, or by, using Plan starts on. Earlier sales may be made at a cent premium to price targets noted above, and limited to bushels. Ignore decision dates and make no sale if prices are lower than $ local cash price/$ November futures.

45 Pre-Harvest Marketing Plan for Spring Wheat Objective: Buy crop insurance to protect my production risk and have % of my anticipated wheat crop (based on APH yield) priced by. Price pounds at $ cash price ($ September futures) using Price pounds at $ c/ f, or by, using Price pounds at $ c/ f, or by, using Price pounds at $ c/ f, or by, using Price pounds at $ c/ f, or by, using Price pounds at $ c/ f, or by, using Price pounds at $ c/ f, or by, using Plan starts on. Earlier sales may be made at a cent premium to price targets noted above, and limited to pounds. Ignore decision dates and make no sale if prices are lower than $ local cash price/$ September futures.

46 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

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53 Set pricing targets minimum price objective - very important! maximum price objective much less important pricing grain below production costs what is your preference? Set decision dates Review seasonal trends support March June pricing Choose your pricing tools rely on simple, low-cost tools for initial sales options and technical tools offer flexibility with discipline - use selectively!

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56 How to Write a Pre-Harvest Marketing Plan Thank you!