I recently updated all of the results for my celebrity grain producers and you can find their year-by-year performance here.
Why celebrity producers? What purpose do they serve? Each of my celebrity producers prices grain in a different manner – you might think of them as each having a distinctly different marketing plan. I use them to understand whether or not any of these approaches can capture an advantage in marketing. Meet my celebrity producers, and learn more about their approach to marketing grain before harvest.
Barney Binless has no interest in marketing grain before harvest. Barney receives the harvest price each year. Every year Barney Binless gets the cash price for corn and soybeans that falls on the Friday between October 12 and 18. For spring wheat, his harvest price is recorded on the Friday between August 20 and 26.
Barney is my benchmark for comparison of other marketing approaches.
Grandma likes to keep her marketing plan simple. She prices 10% of her expected new crop corn, soybeans and spring wheat each month from January through July. Her pre-harvest sales total 70% of her expected crop. She is so dedicated to her simple approach that she makes each sale regardless of price.
Grandma sells December corn futures, November soybean futures and September spring wheat futures each Tuesday between the 4th and 10th of each month (January through July). Futures prices are converted to cash prices using the actual harvest basis each year. For corn and soybeans, the harvest basis is defined as the cash price less the futures price on the Friday that falls between October 12 and 18. For spring wheat, the harvest basis is defined as the cash price less the futures price on the Friday that falls between August 20 and 26.
Justin Price knows his cost of production. Each year, he establishes new price objectives based on his production costs. For example, for corn produced in 2014, he would sell 25% increments at prices of $5.40, $6.10 and $6.80 in the December futures contract. For soybeans in 2014, Justin sells 25% increments at prices of $11.60, $13.10 and $14.60 in the November futures contract. For hard red spring wheat, he sells 25% increments at prices of $7.50, $8.50 and $9.50 in the September futures contract. For all commodities, he sells up to 75% of his expected crop pre-harvest, if all three price objectives are met.
Justin’s pricing window is longer than any other celebrity producer. He is willing to start pricing new crop grain as early as 1 year prior to harvest, defined as November 1 for corn and soybeans, and September 1 for spring wheat. Using his 2014 corn crop as an example, Justin will start on November 1 of 2013, and he will stand ready to sell at his price objectives right up to “harvest,” or Friday, October 17, 2014.
Terry Timer times her sales by pricing 25% of her expected production in March, April and May, for a total of up to 75% sold. Terry is keenly aware of the seasonal tendency for new crop futures to be higher in the March to May period. While her approach seems similar to Grandma’s marketing style, there is an important distinction. Unlike Grandma, who makes sales regardless of price, Terry is unwilling to make a sale if prices are below her minimum price objective. Terry’s minimum pricing objectives are based on production costs and the same ones used by Justin Price. Her minimum prices in 2014 are $5.40 Dec’14 corn futures, $11.60 Nov’14 soybean futures and $7.50 Sep’14 MGEX wheat futures.
Terry prices her grain with the futures market on the Tuesday that falls between the 4th and 10th of each month in March, April and May. Her cash price is calculated later, using the actual harvest basis on the Friday that falls between October 12 and October 18 (or the Friday that falls between August 20 and 26 for spring wheat). If prices are below her minimum when her pricing date arrives, she will not make the sale. Terry is willing to make catch-up sales until the end of May, but makes no more sales after May 31.
Peter Paperfarmer likes Terry Timer’s approach to pricing, making sales in March, April and May, at the same price as Terry. But Peter also likes to keep his “options” open for the possibility of higher prices in the growing season. Peter re-owns each new crop sale with the purchase of an at-the-money call option on new crop futures (December corn, November soybeans or September spring wheat). By harvest, Peter’s price will be the same as Terry’s price, plus any profit or loss from buying an at-the-money call option and selling it on September 15 (for December corn or November soybeans) or at expiration for September spring wheat options (about August 20).
Darla Discipline uses a blended approach that incorporates Justin’s price objectives and Terry’s decision dates for pricing. Her plan starts 1 year in advance of harvest (like Justin’s), and she makes pre-harvest sales whenever a price objective or decision date is reached, whichever comes first. Darla also uses the same minimum pricing objectives as Terry and Justin. Terry and Darla differ in one important respect: while Terry is unwilling to make any sales after May 31, Darla is willing to make “catch-up” sales during the summer.
Margery the Fortune Teller uses her crystal ball to forecast the highest price in the year ahead. She sells the highest price for December corn, November soybeans or September spring wheat in the year before harvest (For corn and soybeans starting November 1 of the prior year, and up to September 30. For wheat starting September 1 of the prior year, and up to August 20).
Rocky Bottom is a hard luck grain marketer, always managing to sell the low price in the market. He sells the lowest price for December corn, November soybeans or September spring wheat in the year before harvest (For corn and soybeans starting November 1 of the prior year, and up to September 30. For wheat starting September 1 of the prior year, and up to August 20).
Margery and Rocky represent the high and low prices, respectively, and more benchmarks for comparison.
Wally Whipsaw uses 20/20 hindsight to make pre-harvest sales this year when he should have sold last year, based on the high price in the previous year (per Margery). Does this seem like a silly approach to marketing? I happen to believe it is the most common marketing approach used by grain farmers.