Lock in profits with pre-harvest marketing strategies

Will you make more money this year if you price your grain before harvest?

Pre-harvest and post-harvest planning is on the agenda. Farm Futures Business Summit, from January 9th to 11th, is where I’m talking. Featured topics for the session include target prices, decision dates, and pricing tools. When diving into post-harvest planning, consider when and how it would be profitable to store grain.

For regular readers, the pre-harvest marketing strategies of eight “famous producers” are a well-known feature. my farm futures column. The characters are a product of my imagination, but their marketing techniques will be familiar to many readers. Some companies focus on price targets, while others focus on the timing of sales. Additionally, some companies use options in pre-harvest pricing. Everything is focused on increasing profits.

Looking back at the strategies of celebrities Comparing performance over the past 35 years may be helpful when considering pre-harvest pricing opportunities for the 2024 crop. What are the advantages and disadvantages of each approach?

Introducing the characters: What type of marketer are you?

The data comes from average cash corn and soybean prices in Iowa, collected by the USDA’s Agricultural Marketing Service’s Livestock, Poultry and Grain Market News and reported by the Iowa Department of Agriculture and Land Stewardship.

All pre-harvest sales are based on Chicago Commodity Exchange Commission prices and are subject to the use of futures or options contracts. Futures prices are converted to cash prices using harvest standards.

This summary generates a lot of numbers. Consider these four questions when creating a pre-harvest marketing plan for your 2024 crop.

1. Do I need to have a pre-harvest marketing plan? This question is the easiest to answer. Look at the results for Barney Binless, the only producer without a marketing plan. His harvest price was the lowest of any other player in years. His average price was also the lowest among celebrities. Yes, everyone should have a pre-harvest marketing plan.

2. Is a floor price target necessary? To answer that, we need to compare and contrast the performance of two of the best pre-harvest marketers: Aunt Tilly and Terry Timer. The average price is the best.

Tilly and Terry are timing-oriented marketers, with pre-harvest sales occurring from March to June each year. What’s the difference between them? Terry has a floor price target based on his break-even production costs. For eight of her 35 years, Terry’s price was the same as Bernie’s harvest price. This simply means that at that time Terry had no pre-harvest pricing opportunities to meet his production costs and no pre-harvest sales.

Tilly was active every year. He could do well at times, but overall Terry had the advantage over Tilly. I don’t like pricing grain below the cost of production, and Terry’s modest advantage over Tilly confirms my bias. I’m not saying never to price below cost, but I think pre-harvest planning should include a minimum price target that matches the cost of production.

3. How early should I start pricing new grains? Justin Price answers this question. Despite outperforming Bernie’s more than half the year, his average corn price is the same as Bernie’s, and soybeans are only 4 cents more expensive.

Justin’s problem is his willingness to start too early and too cheap. His initial price target is based on production costs. That’s a good thing, but his reliance solely on high price targets in the second half of the plan means he misses out on the opportunities Terry identified in the March-June period.

Justin often sticks to one or two early cheap sales and then passes on good (but not great) pricing opportunities.

Darla also starts early, but mixes in Terry’s dates in the spring for timing action. This improves her performance, but the “too early, too cheap” sale is holding her back.
Top performer.

Will I, like Justin and Darla, start pricing next year’s crops a full year (or more) before harvest? Yes, I do.

But to avoid their “too early and too cheap” regret, I’m going to demand a premium for early sales of 50 cents to 75 cents above the break-even production cost.

4. Does the option add value to pre-harvest marketing? Peter Paperfarmer and Uncle Buck are option buyers. Peter buys the call and re-owns the sale, and Buck buys his put option.

On the other hand, I’m impressed that both players outperformed Bernie’s harvest price on average. On the other hand, it doesn’t perform as well as Terry’s average price.

Purchasing options is often compared to purchasing insurance. Should you be surprised to learn that insurance, even though it pays out occasionally, costs money in the long run? (Incidentally, the slight difference between Peter and Buck can be attributed primarily to differences in time value and exit dates. Peter sells calls in mid-September, while Buck sells puts until early October harvest. (I will keep it.)

Covered Cal is a call options company. This is an unconventional approach to hedging. The call seller has a limited profit and a limited hedge, i.e. the premium he receives for selling the call. His strategy is a flat price strategy that works best when prices remain within a trading range.

Options add value to marketing. Think back to years when prices skyrocketed, like the drought year of 2012. Peter and Buck were able to cope with their options. Now consider the many other years in which there was no noticeable trend in prices. It was Cal’s year to shine.

I don’t use options much, but they have their moments. My advice? Be selective.

dig deeper

I hope my answers to the previous four questions will help you create your pre-harvest marketing plan.
For the 2024 crop year.

To get into the weeds even further, a number of readers asked me the following question:

Is there a plan to price grain before the 2024 harvest? Yes, my 2024 corn and soybean pre-harvest marketing plan is shown in the story below. I’ve been writing plans for over 20 years, wanting to do better than Barney and his harvest prices.

If you look closely at my pre-harvest marketing plan, you’ll see that it incorporates wisdom gleaned from marketing summaries.

Is a floor price target necessary? yes! Using data from the national farm financial database Finbin (finbin.umn.edu) and listen to the wisdom of Minnesota farmers and assume 2024 production costs of $5.05 and $12.40 per bushel for corn and soybeans, respectively.These are my lowest prices
Goal for 2024.

When does grain pricing start? Both plans have a Jan. 1 start date, but they intend to start earlier with prices 50 cents above production costs for corn and 75 cents for soybeans.

Do you want to use options? My plans are intentionally vague about the tools I’ll use. “TBD” means “TBD” and includes consideration of all pricing tools, including options.

Where can I find your book? To learn more about these characters and other famous producers involved in postharvest marketing, check out my book, Grain Marketing is Simple (Not Easy). lulu.com.

I hope my characters will give you something to think about as you plan for 2024. Please do your best next year.

Corn pre-harvest marketing plan

This is based on a farm in southern Minnesota or northern Iowa that produces 100,000 bushels of corn. Under the December contract, it assumes a production cost of $5.05 per bushel and a 40 cent harvest standard. (Production costs and standards must be tailored to the region.)

My goal is to purchase crop insurance to protect production risks and have 75% of my projected corn crop priced based on actual historical production yields at the following levels by late June:

My plans start January 1st. Sales before then may be at a 50 cent premium and sales will be limited to 30,000 bushels.

If the price is lower than the local spot price of $5.05 or the December futures price of $5.45, ignore the decision date and do not sell. We will exit all option positions by mid-September.

Soybean pre-harvest marketing plan

This is based on a farm in southern Minnesota or northern Iowa that produces 27,000 bushels of soybeans. Under the November contract, it assumes a production cost of $12.40 per bushel and a 50-cent harvest standard. (Production costs and standards must be tailored to the region.)

My goal is to purchase crop insurance to protect production risks and price 75% of the expected soybean crop (per APH yield) at the next level by late June.

My plans start on January 1st. Sales before then may be made at a premium of 75 cents and are limited to 10,000 bushels. If the price is lower than the local spot price of $12.40 or his November futures price of $12.90, ignore the decision date and do not sell. We will exit all option positions by mid-September.

For more information on how to navigate volatile markets, Farm Futures Business Summit Held January 9-11, 2024 in Coralville, Iowa.