Blogging by the Bushel
With numerous challenges over the past several years for producers, we at Mercer Landmark understand the need for a comprehensive risk management solution. We seek to provide our customers with unparalleled service to ensure maximum results.

Archive for January, 2011

Marketing 101 – Cost of Production is your first step

I was reading an article this morning that really got me thinking, so I thought I would pass some of its wisdom on in the hopes that it would make your cloudy crystal ball a little clearer.  First and foremost there is an enormous amount of bullish sentiment in the market now for all commodities.  So naturally it is easy to put marketing on the back burner. According to Carl German, University of Delaware Extension grain marketing specialist that is a huge mistake and I agree. With the cost of production and volatility rising everyday more and more money is at risk so it is a no brainer that a profitable situation can quickly turn unprofitable with just a small reduction in price or yield. German and others like myself urge that you set price goals that will cover your cost of production and return to management with an eye to protect profits, especially on the portion of a crop not covered by crop insurance.

 A good suggestion that was made was to use a budget that includes direct costs (fertilizers, crop protection, seed, drying storage and crop insurance); power (utilities, machine hire/lease, machine repair, fuel, oil, light vehicle use, machine depreciation) and labor and overhead (hired labor, building repair or rent, building depreciation, insurance, miscellaneous and non land interest). Then figure expected revenue (yield times price plus government direct payments). This will show the return that you the producer can tentatively expect. Rising production costs have increased the break-even price necessary to cover costs. Covering cost of production should be your minimum price objective, said German. “Add a  margin for return to management for a higher price objective,” he advised. “Crop revenue insurance may provide sufficient protection so you don’t lose money on insured acres, but you may want to protect acres or expected bushels not covered. Defined goals will help keep you from getting swept away in the bullish sentiment and not making any sales. It will help keep market action in perspective and provide a true measure of how good the historically high prices really are.

Every article that you read continues to talk about the bid for acres that is going to have to take place. This idea that U.S. corn and soybean prices have to bid to expand acres this spring has encouraged many to wait for better forward pricing opportunities. In the mean time locally new-crop beans approached $13.00, new-crop corn near $5.50 and amazingly wheat at almost $8.00 a bushel! These levels are rarely seen. I challenge you to pull up a long term chart and see how many times in history prices have been at these levels? I do not know an exact number but I am sure it is not very many at all. This should be a good indication that the downside risk is even greater than the upside potential at these prices.

There are many pricing methods you can use, each with its advantages and disadvantages. The most simple of which is the cash forward contracts but there are many newer and more in depth contracts as well. Specific to Mercer Landmark is the Market Max contract. It lets you set a minimum price for a certain delivery time frame, for a marginal cost, usually 10-20% less than a call option, all while still having unlimited upside potential. Talk about a tool that will help eliminate some of the emotions that come with pricing grain and fears that the markets will go higher after you sell.  In addition there are brokerage services available for the more sophisticated marketer. Futures hedges don’t tie you into delivery at a specific location, but they do carry the risk of margin calls if prices rise. Put options set a price floor but can be expensive, especially when volatility is high.

If you take anything out of this article please take this one thing, market planning is not a one-time event, it is an ongoing process. There is never a direct route to the end. Sometimes the answer is using several different pricing tools on portions of your crop and remember there is always help at your disposal through your local elevator and/or marketing service.

Anna Kaverman
Mercer Landmark

The January crop report is in the past and now both farmers and traders alike are scratching their heads as to where the market will go next and how high prices will go. Both are million dollar questions that we all wish we knew the answer to. The one thing we do know is that the USDA data confirmed what the market already knew and that is that corn and soybean stocks are uncomfortably tight. Over the next three months, the prices of corn and soybeans have two major objectives. First, prices must allocate remaining old crop supplies to maintain at least pipeline stocks by the end of the current marketing year. Second, prices must direct spring planting decisions.
For soybeans, the USDA now projects that the combined total of domestic crush and exports during the current marketing year will reach 3.245 billion bushels. That is only 8 million bushels, or 0.25 percent, less than the total of last year. At the projected level of use, year-ending stocks would total only 140 million bushels. Ending stocks cannot be reduced much below 140 million bushels and still maintain pipeline supplies so total use cannot exceed current projections by a substantial amount.
For corn, the USDA now projects 2010-11 marketing year consumption at 13.43 billion bushels. That is 364 million bushels, or 2.8 percent, more than consumed last year. At the projected level of consumption, year-ending stocks will total only 745 million bushels, or 5.5 percent. Stocks cannot be reduced much below that level and still maintain pipeline supplies, so total consumption cannot substantially exceed the current projection. Corn exports from Dec. 1 through Jan. 6 were 21 million bushels (15.4 percent) larger than during the same period last year. Ethanol use of corn was 55 million bushels (11.6 percent) larger than during the same period a year ago.
The prospect for both very tight year-ending stocks of corn and soybeans and a continuation of strong demand implies that 2011 crops need to be large. More U.S. acreage of both crops may be needed to meet projected consumption levels at reasonable prices and to start rebuilding domestic stocks to a more acceptable level. Planted acreage of all crops in the United States declined by 8.3 million acres from 2008 to 2010. At the same time, acreage enrolled in the Conservation Reserve Program declined by 3.4 million acres. These changes suggest that as much as 11.7 million acres of additional crop land (including double-cropped acres) may be available for planting in 2011. Of that total, 3.7 million has already been planted to winter wheat. Double-cropped acreage of soybeans following wheat harvest could increase by 2 million acres, following a similar decline last year. That leaves 6 million acres for additional acreage of spring planted crops in 2011.

Anna Kaverman
Mercer Landmark

  We have all heard the saying out with the old and in with the new and 2010 is no exception. 2010 was a year that saw new all time high prices paid for cotton and cattle, and saw grain prices rallying back toward 2008 highs that some had assumed would not be seen again in their lifetime. Before you settle in for the bitter Midwest winter and await the start of baseball spring training (the unofficial end of winter) in late February, (Go Reds!) there is one more end-of-year ritual we need to get through: USDA’s January report. Analysts, economists and traders alike are all anxiously awaiting for next Wednesday’s report like children waiting for Santa. If history lends itself to any indication we could see some fireworks after it is released.

Think back to last year’s USDA reports where the combination of the “final” crop production numbers for corn and soybeans (both domestic and global), ending stocks for all grains (both domestic and global), quarterly stocks, and winter wheat acreage set off a pyrotechnic display in the Chicago grain markets the likes of which has seldom been equaled. By the end of trade Tuesday, January 12, 2010, corn contracts were down the limit 30 cents, soybeans were off “only” 32 1/2 cents, and the front-month wheat contract had tumbled 36 3/4 cents. Why? Well, as we all recall, most of the numbers came in just a tad larger than what had been anticipated. So what does all this mean for 2011? Without a doubt it is safe to say that 2010-2011 corn production numbers remain highly questionable, despite the sharp cuts seen by USDA in recent months. In soybeans, the questions are more geared toward global demand with many thinking the demand number could continue to increase, lowering global ending stocks and stocks to use.

And then there is wheat which is once again following on the coattails of corn and soybeans as global 2010 production problems carryover into 2011 with the flooding in Australia. Given the situation down under, how much further will global stocks be trimmed? Will the greater supply of global feed wheat (lower-quality wheat) lead to lower demand for corn, something hinted at in the December round of numbers? Don’t forget about winter wheat acreage either. Though still expected to come in larger than 2010 numbers, the reality of the situation is that acres could ultimately be lost in parts of the Southern Plains due to poor growing conditions as the crop moved into dormancy late last fall. With farmers in the area reporting no significant precipitation since last September, talk is growing louder that at least some wheat acres being worked up and replanted to corn and soybeans.

Last, but certainly not least, are the funds. As of the latest CFTC Commitments of Traders report this group held a record large net-long futures position in corn of about 480,000 contracts, a record net-long position of about 228,000 contracts in soybeans, and built the net-long Chicago wheat futures position to almost 28,000 contracts.

Do I think next Wednesday’s reports will answer any of the questions listed above? No, not necessarily. After the initial “oohs”, “aahs” and surprises that accompany most reports the smoke will eventually clear and the markets will go back to their normal, highly volatile selves as they face the rest of the New Year. A new year that I am sure will filled with excitement and confusion.

Anna Kaverman

Mercer Landmark