Celebrity Squares Search for a Pre-Harvest Advantage

1. Celebrity Squares Search for a Pre-Harvest Advantage Edward C. Usset, Grain Marketing Specialist Center for Farm Financial Management University of Minnesota email: usset001@umn.edu

2. Center for Farm Financial Management A comprehensive whole farm financial planning and analysis system A tool to help develop, monitor and implement marketing plans for crops and milk 1-800-234-1111 www.cffm.umn.edu

3. WtG 1: The Pre-Harvest Marketing AdvantageWtG 2: Launch Your Pre-Harvest Marketing Plan Pre-harvest marketing is a broad view of the market, trying to take advantage of early seasonal price tendencies. Crop insurance is a critical part of marketing. Winner of the 2004 AAEA Distinguished Extension Group Award!

4. WtG 3: The Post Harvest Marketing Challenge Post harvest marketing is a practical approach to the current environment, adapting to market signals and incentives. Tactics may change from one year to the next. Call CFFM at 800-234-1111 for more information about how to sponsor a “Winning the Game” workshop in your town.

5. Agenda • Meet our celebrity producers • Discuss their pre-harvest marketing styles • Can our celebrities find a pre-harvest advantage? • Can we improve their plans? • 2006 pre-harvest plans

6. Why is Marketing Important? • The average farm earns 20-30 cents per bushel (including gov’t payments). Just 10 cents more per bushel could increase net income by 33-50%! • Great marketing is not finding the high price. It’s finding an extra 10-20 cents per bushel with a solid plan that avoids mistakes. Can our celebrities find a dime?

7. What is the Pre-Harvest Advantage? Early sales could be our best sales. Can we find a dime in pre-harvest marketing?

8. Let’s meet our celebrities…

9. Barney Binless Barney has no storage and no interest in pre-harvest marketing. He is our benchmark - his price is the harvest price each year.

10. Grandma Grandma likes to keep her marketing plan simple. She prices 10% of her new crop corn, soybeans and wheat each month from January thru July – 70% of her total expected crop.

11. Justin Price Justin only pays attention to prices. He is willing to price 25% increments at… $2.50, $2.75 & $3.00 Dec. Corn $5.50, $6.25 & $7.00 Nov. Soybeans$3.50, $3.85 & $4.20 Sept. Wheat

12. Southern MN Cost of Production FINBIN Average, Cash Rent, 2000-2003 “The break even price to cover all costs and a return to labor & management” $2.50 December futures, or $2.10 cash price (the harvest basis averages 40 cents under), is consistent with a break-even cost of production.

13. Frequency that Chicago December Corn Futures Exceeded Given Price Level, 1980-2005 Pricing Targets

14. Frequency that Chicago December Corn Futures Exceeded Given Price Level, 1980-2005 Pricing Targets

15. Southern MN Cost of Production FINBIN Average, Cash Rent, 2000-2003 “The break even price to cover all costs and a return to labor & management” $5.50 November futures, or $5.00 cash price (the harvest basis averages 50 cents under), is consistent with a break-even cost of production.

16. Frequency that Chicago November Soybean Futures Exceeded Given Price Level, 1980-2005 Pricing Targets

17. Frequency that Chicago November Soybean Futures Exceeded Given Price Level, 1980-2005 Pricing Targets

18. Terry Timer Terry pays attention to the seasonal highs in new crop futures prices by pricing 25% increments in March, April and May. But she won’t sell if Dec. corn <$2.50, Nov. soybeans <$5.50, or Sept. wheat <$3.50.

19. CBOT December Corn Futures, 1980-2005 • 19 years (73%) the market declined • 7 years (27%) the market improved • 14 years the market declined more than 25 cents!

20. Pre-Harvest Seasonal Price Trends

21. CBOT November Soybean Futures, 1980-2005 • 17 years (65%) the market declined • 9 years (35%) the market improved • 12 years the market declined more than 50 cents!

22. Pre-Harvest Seasonal Price Trends

23. MGEX September Spring Wheat, 1980-2005 16 years (62%) the market declined 10 years (38%) the market improved 13 years the market declined more than 25 cents!

24. Pre-Harvest Seasonal Price Trends

25. Peter likes Terry’s approach to pricing but he “re-owns” each sale with the purchase of a call. He gets Terry’s price, plus any profit or loss from buying an at-the-money December corn call option and holding to September 15 (November soybean calls, Sept wheat calls). Peter Paperfarmer

26. Meet Our Celebrities… minimum price = grain selling price – premium paid for calls - fees Peter Paperfarmer Worst case scenario? (i.e. minimum price) $2.35 cash price - 0.17 option cost – 0.01 fee = $2.17 Best case scenario?Poised for profits should December futures go higher than $2.97 ($2.80 + 0.17 + 0.01) No limit to your upside potential!

27. Celebrity Squares Search for a Pre-Harvest Advantage – Corn/Soybeans About the search: The search for a pre-harvest advantage took place in SW Minnesota (43 under average corn basis, 51 under for soybeans) using actual prices for a 25-year period, 1980-2004. All pre-harvest sales used December or November futures less the actual harvest basis. LDP’s were not considered.

28. Celebrity Squares Search for a Pre-Harvest Advantage – Corn/Soybeans Barney Binless gets the Tuesday price between October 12-18. Grandma sells December or November futures each Tuesday between the 4th and 10th of the month, January-July, less the actual harvest basis. Justin Price sells when December new crop futures reaches $2.50, $2.75, and $3.00 per bushel (or $5.50, $6.25, and $7.00 November soybeans), anytime starting November 1 of a year earlier.

29. Celebrity Squares Search for a Pre-Harvest Advantage – Corn/Soybeans Terry Timer sells December or November futures each Tuesday between the 4th and 10th of March, April and May, less the actual harvest basis. She will not sell December corn futures less than $2.50 or November soybean futures less than $5.50, or after June 1. Peter Paperfarmer shadows Terry but “re-owns” each sale with an at-the-money December corn call or November soybean call, sold on September 15. Option premiums before 1990 were estimated.

30. Celebrity Results Corn, 1980-2004 Remember – 25% of Justin, Terry and Peter’s price is the harvest price, as is 30% of Grandma’s price.

31. Celebrity Results Corn, 1980-2004 Let’s compare to Barney Binless! * Out of 25 years

32. Celebrity Results Corn, 1980-2004 Barney vs. Grandma • Grandma found the dime! • High odds of a better year • Slow but steady adds value! * Out of 25 years

33. Celebrity Results Corn, 1980-2004 Barney vs. Justin • Justin found the dime! • High odds of a better year • Price targets work! * Out of 25 years

34. Celebrity Results Corn, 1980-2004 Barney vs. Terry • Terry found 14 cents! • Good odds of a better year • Timed selling works too! * Out of 25 years

35. Celebrity Results Corn, 1980-2004 Barney vs. Peter • Even Peter found 8 cents! • Ok odds of a better year • Options cost him 6 cents * Out of 25 years

36. Celebrity Results Corn, 1980-2004 * Out of 25 years

37. Celebrity Results Soybeans, 1980-2004 Remember – 25% of Justin, Terry and Peter’s price is the harvest price, as is 30% of Grandma’s price.

38. Celebrity Results Soybeans, 1980-2004 Let’s compare to Barney Binless! * Out of 25 years

39. Celebrity Results Soybeans, 1980-2004 Barney vs. Grandma • Grandma found the dime! • High odds of a better year • Slow but steady adds value! * Out of 25 years

40. Celebrity Results Soybeans, 1980-2004 Barney vs. Justin • Justin found 15 cents! • High odds of a better year • Price targets work! * Out of 25 years

41. Celebrity Results Soybeans, 1980-2004 Barney vs. Terry • Terry found 18 cents! • Good odds of a better year • Timed selling works too! * Out of 25 years

42. Celebrity Results Soybeans, 1980-2004 Barney vs. Peter • Even Peter found 15 cents! • Good odds of a better year • Options cost him 3 cents * Out of 25 years

43. Celebrity Results Soybeans, 1980-2004 * Out of 25 years

44. What can we conclude from our celebrity search for a pre-harvest advantage? Everybody with a plan found the dime, and everybody with a plan beat the harvest price, so… Have a plan!

45. Can we improve their pre-harvest marketing plans?

46. Grandma has a plan.How could we improve it? Simple is nice, but does it make sense to price grain at less than my loan rate? Grandma needs a minimum price objective.

47. Justin has a plan.How could we improve it? Getting your price is great, but what about those years when the market offers good, but not great, prices? Justin needs to mix in some decision dates.

48. Terry has a plan.How could we improve it? Seasonal price trends are interesting, but does it make sense to forego earlier or later sales at any price? Terry needs to mix in some price objectives too.

49. Comparing Peter’s results to Terry shows that, in the long run, options cost money. Peter profited from options in 3 of 19 years in corn, 4 of 21 years in soybeans, and , 2 of 12 years in wheat. But options can be used to get us to 100% sold! Peter has a plan.How could we improve it?

50. Corn 2006 Pre-Harvest Marketing Plan Objective: Buy crop insurance to protect my production risk, and have 75% of my anticipated corn crop (based on APH yield)priced by late May.Price 10,000 bushels at $2.10 cash price ($2.50 Dec. futures) using forward contract/futures hedge/futures fixed contract. HTA 1-3-06 @ $2.51½ Dec’06 Price 10,000 bushels at $2.22c/2.62f, or by March 29, pricing tool tbd. Price 10,000 bushels at $2.34c/2.74f, or by April 7, pricing tool tbd.Price 15,000 bushels at $2.46c/2.86f, or by April 27,pricing tool tbd.Price 10,000 bushels at $2.58c/2.98f, or by May 13,pricing tool tbd.Price 10,000 bushels at $2.70c/3.10f, or by May 27,pricing tool tbd.Plan starts on November 1, 2005. Earlier sales will be made at a 15 cent premium to price targets noted above.Ignore decision dates and make no sale if prices are lower than $2.10 local cash price/$2.50 December futures. I will “revisit” my minimum price in February, 2006. Exit all options positions by mid-September. http://www.cffm.umn.edu/Marketing/MarketingPlans.asp