The following commentary does not necessarily reflect the views of AgWeb or Farm Journal Media.
Recently, I wrote that the first five farmers who sent me a marketing question would get an answer from Farm Journal. The response from readers was quick and slightly overwhelming. Within an hour of making that opportunity available, I had nearly two dozen responses and some excellent questions. In the following days, I will be posting some of the farmers' questions along with some answers from our very own Farm Journal Economist, Chip Flory. This is my third installment in the series. I hope the information provided is of service to you. -Rhonda Brooks
1. A question from Spencer in Chanute, Kansas: What is the danger of forward contracting grain without carrying crop insurance?
Chip’s answer: Opportunity risk (upside price movement after selling). Some argue there is no opportunity risk if you sell at profitable levels. And the risk of selling too many bushels and not having the physical bushels to deliver against the forward contracts. If you’re in that situation and you do have the crop insurance, you can use a portion of the crop-insurance payment to buy yourself out of the forward contracts. Without the insurance coverage, buying out of the forward contracts comes out of the revenue you get for the bushels you do have to sell.
2. A question from Troy in Rosemount, Michigan: How does purchasing MPCI crop insurance allow me to forward contract? If I were to buy an 85% RI plan with 180 APH that would give me up to 153 bushels to forward contract. If I had a bad year and I can’t produce the 153 bushels and the price increases due to a shortage of bushels in my area or nationally, I would have to cover the difference out of pocket. Wouldn’t I be better off waiting until I know what I have in the bin before selling?
Chip’s answer: You absolutely could be better off to wait. But even in short-crop years, prices normally top well ahead of harvest--late-summer is often the best-selling opportunity after prices have advanced to account for the lost bushels to a high enough level to start to choke off demand. And this may not have been made clear in the original article: Don’t sell 100% of your insured bushels (the 153 bu. in your example). Sell only what you are comfortable selling. Maybe that’s half the insured bushels… maybe that’s two-thirds, but don’t sell them all… two-thirds may be the target in a year with a potential crop problem. But using the revenue protection crop insurance to give you the confidence to pre-sell is admittedly best-used in a year with hefty beginning stocks (like 2018-19) and no immediate threat to the crop. It should give you the courage to sell-forward on a “typical” spring rally.
3. A question from Curt in St. Paul, Nebraska: I don't really understand the put or call or hedging part of marketing. Can you help?
Chip’s answer: Give “This is How Options Work” on AgWeb.com a read: https://www.agweb.com/article/this-is-how-options-work-naa-chip-flory/
Hedging sets a price, but not the basis. A hedge is a short position in futures against the grain you are growing or is already in the bin. The only risk in a hedge is basis, so you want to hedge when basis is below average and prices are at a level that you want to capture (either because they are “high” or because you are concerned they will go even lower). When you hedge, your net selling price will be the hedge price plus basis. If futures are at $4 and basis is -50 cents, the current value of the corn is $3.50. If basis firms to -30 cents, the value of the hedge is $3.70. If basis goes to even when you make the cash sale, the net price is $4.00. That’s true if the futures market goes to $2 or to $6. The reason: you set the price with the hedge and any gain on the hedge (move to $2) will be offset by losses in the cash market; any losses on the hedge (move to $6) will be offset by gains in the cash market. That’s why the only risk on a hedge is basis movement. It’s just one position (futures) offsetting the other (cash, or physical bushels).
4. A question from Lloyd in Wakeeney, Kansas: In the past I have always sold wheat now. For 2018 wheat harvest should have sold a week ago but we are so, so dry here. Any thoughts on when to market? I do have a couple of puts on wheat now.
Chip’s answer: Don’t worry about “when” or at “what price.” Put a line in the sand under the market. If that support level is broken, it’s time to increase sales. If the market continues to rally, keep raising the line in the sand. Don’t worry about selling “the” high – this strategy will allow you to increase your average selling price. Start with a plan to sell 10% of expected production if your support level is broken. If that happens, re-evaluate based on the updated fundamentals. If the market moves higher, keep yourself from getting “more bullish as prices rise” by increasing the amount you are willing to sell when the support is broken – each time you raise the line in the sand, increase the amount you are willing to sell when the support level is broken by 5% (for example) of expected production. And keep an eye on your crop percentages… what was 30% of expected production last week might be 40% of expected production this week. You will not sell “the” high with this strategy, but it will increase you average selling price more than a standard scale-up selling strategy.