My post-harvest strategy for soybeans this year is straightforward; sell every bushel at harvest. You can find a written version of my post-harvest plan here.

Here’s my thought process. First, there is no carry in the market and, therefor, no market incentive to store grain. Second, the harvest basis is very good, 30-40 cents under the November contract in many parts of Southern Minnesota and Northern Iowa (and we should be thrilled that the 100-150 cents under stuff of recent years is gone). Finally, I was an aggressive in pricing soybeans before harvest. I estimate an average cash price of $10.50 per bushel for the 2009 crop.

What about my “upside” potential after harvest. At-the-money July calls will cost close to $1 per bushel. I prefer to play it conservative and keep my money. Besides, I have a 2010 pre-harvest marketing plan in place – I’m hoping for a strong rally in the months ahead so I can move forward with more pricing of the 2010 crop.

Followers of my celebrity producers know that, at harvest, I like to ask, “What would Earl do?”  Earl Eitheror is my celebrity producer who makea simple choice at harvest. If carring charges are large, he stores grain on-farm and sells the carry in the market. If carrying charges are small (like this year in soybeans), Earl holds unpriced grain in storage for sale in the month of May. I respect Earls performance over time, but I reserve my right to use judgment and consider my own appetite for risk. I say good luck to Earl with unpriced soybeans in the bin, but I choose a different direction.

I will be posting my plans for corn after harvest within the next week.

Dec'09 - Jul'10 carrying charges

Corn harvest is in full swing in Southern Minnesota and producers are facing the ultimate in post-harvest marketing question; to store or not to store? I received this from a farmer earielr this week…

 I have a question on market carry and storage risk. I have my unsold 2009 corn bushels covered with December puts at a very healthy profit. There is about a 28 cent carry to next July [it's actually over 32 cents per bushel]. It seems that in the past you’ve said a 25 cent carry [from December to July] is good. I’m unsure if this 28 cents is worth the risk with the poor quality of the corn crop this year. What are your thoughts on this?

In response to higher grain prices two years ago, I changed the way I measure and define “large” or “small” carrying charges.  My new way of measuring carrying charges is a three-step process.  Let’s assess the current carrying charges in the corn market, using closing prices for Dec’09 and Jul’10 corn futures from November 10, 2009.

 Step 1: calculate the carrying charge    $4.26¼ (Jul’10) – $3.93¾ (Dec’09) = 32½ cents per bushel

 Step 2: calculate a per bushel interest cost for grain storage     $3.54 (cash grain price) * 4.25% (prime plus 1% interest rate) * 7 months (Dec- July) / 12 months per year = 8¾ cents

 Step 3: compare the size of the carry (Step 1) to interest costs (Step 2)  32.5 cents carry / 8.75 cents interest cost = 370%

Let me restate the results in English: The current carrying charge of 32½ cents from December to July will cover interest costs of holding grain in storage nearly four times over.  According to my records, the current corn carry of 370% of interest costs at harvest time is the fourth largest since 1990 (2001, 2004, and 2005 were slightly larger).  My definition of a “large” carry is, carrying charge / interest cost > 140%, and clearly we exceed this figure.

I like to sell a large carry against grain held in storage.  If you don’t like using futures directly, enter into an HTA contract using the July futures base of $4.26 per bushel.  Assuming a spring/early summer basis of 40 cents under July (it could be better), you will end up with a cash price of about $3.86 per bushel, more than 30 cents more than the harvest price and more than enough to cover your variable costs of storage on-farm.  Selling the carry also hedges you against lower prices and allows you to defer income to next year.  The downside of selling the carry is the, uh, upside in the market – you have none.  If prices rise $1 in the months ahead (not my prediction, but I’ve been wrong before), you will end up with a price of about $3.86 for your corn.

 

The first post on this blog (14 months ago) concerned my brother Albert and his hobby-gone-wild of collecting old tractors. I recently asked him about any new additions to the list, and I was a bit disappointed to learn that he had not acquired a tractor in the past year. As a consolation prize, he offered me a long list of supporting farm equipment purchased over the years.

Hay Wagons (6)      

Disks (2): Oliver 252 15 ft., Oliver 250 11 ft.

Rakes (2): New Holland 55, New Holland 56

Balers (2): New Holland 273, New Holland 268

His balers produce square bales. Albert is strongly opposed to round balers, claiming the cows can’t get a square meal.   By the way, every tractor and piece of equipment in Al’s possession is in good working order – he would have it no other way.

You might think that a person who owns 27 tractors and a long list of supporting equipment must live on a 4,000 acre ranch in western Minnesota. He and Barb live on an 80 acre hobby/horse farm located 30 miles straight west of downtown Minnapolis.

 

I received a good question concerning the Minnesota Master Marketer Program. It’s a question I hear from loyal past attendees who wonder when it will happen again. My response follows.

“Ed, I puddle around and find a class of young fellows interested in marketing. Are there plans for another Master Marketer Program? I am located in SE Minnesota. I traveled to the first one in Mankato and picked up Elwynn Taylor in Owatonna. I found it rewarding.”

Over an eight-year period (1999-2006), I led the effort to put together 11 different Master Marketer Programs, all but one in Minnesota (I like our producer friends in Sioux Falls, too). Modeled after a program of the same name in Texas, the Minnesota Master Marketer Program was a training program for grain producers, intended to develop their grain marketing skills (The Texas program remains active – click here).  We reached nearly 500 producers with the program.

The training was intense and the list of speakers impressive. I would invite Dr. Robert Wisner from Iowa State University to discuss fundamental analysis of grain markets. Alan Brugler of Brugler Marketing often joined us for a full day devoted to technical analysis. Dr Elwynn Taylor, Climatologist at Iowa State University, was always fun and enlightening to hear. I would invite a long list of other speaker to address crop insurance, production costs, marketing clubs and other topics. And, yes, I would be involved with sessions on writing a marketing plan and executing them in a simulated grain marketing game.

The feedback from our producer participants was outstanding – they loved it!  So why have we not put on a Master Marketer Program in the past three years, and why is none planned for 2010?

Every Master Marketer Program we produced presented the University (and our Center for Farm Financial Management) with two difficult challenges; time and money. It is not an easy task to identify producers who have six days to attend the program. Every year we would promote and call, then call and promote, to find the 50 producers needed to make it work. Many times during the Master Marketer years, I would hear from Minnesota producers who would say, “I really wanted to attend the program, but I could not spare the six days needed to participate” (as you know, many producers have jobs or run businesses during the winter months). The lack of attendees would lead to the other challenge of money.

For our last program in 2006, we charged producers $350 to attend. Multiply that figure by 50 participants and it sounds like a lot of money. Start paying the fees and travel expenses for 6-8 different speakers, print materials, rent space and buy the “eats and treats” for 50 people over six days and you will learn that it is not a lot of money. We struggled each time to make the program break even. It had to break even because the University is not in a financial position to subsidize a program that reached just 50 producers.

The challenges presented by the Master Marketer Program may explain our success with our “Winning the Game” and “Tool Time” marketing programs. Half-day programs open the door to many more participants and the cost is reasonable enough that one or two local sponsors can make it happen. It also helps that the Minnesota Soybean Growers Association covers many of the costs related to the continued development and distribution of these programs. I understand that the depth and breadth of topics covered in “Winning the Game” is not as impressive as a six-day program, but I like to think that attending a number of different programs will come close. Many shorter programs also has the advantage of developing and reinforcing lessons learned in earlier programs. Six days of intensive training over a few weeks time had one distinct disadvantage; it was too much information for many producers to absorb.

I will never say never to another Master Marketer Program, but a number of special circumstances are needed to make it happen, including a partner to help us with funding and attendance. When we could pull it off, the Minnesota Master Marketer Program was a real winner.

It slipped under my radar, but the Sep’11 spring wheat contract (new crop for 2011) started trading about 10 days ago. It closed at $6.27 on the first day but, if you have not noticed, grain prices are strong. The Sep’11 contract closed today at a nice round figure of $6.50 per bushel. There are 8 contracts open as of yesterday.

I am cautious about pricing grain more than one year out and I am not suggesting that you should take action just because you can. But $6.50 futures ($6 plus cash wheat) is a good enough price to make you think. Patience.

Several years ago (2002?), the Minneapolis Grain Exchange introduced a number of new futures contracts based on cash grain indexes for hard red winter wheat, soft red winter wheat, corn and soybeans. These contracts have not generated much interest until this month.

As recently as September 25, there were no open contracts in the SRWI (soft red wheat index) contract. The first open contracts appeared on September 28 and, over the past 15 trading days, open interest increased every day. It jumped over 300 contracts on Friday, and open interest now stands at 1,200 contracts.

Why futures contracts succeed or fail is a rich topic, and I would be hard pressed to explain the recent interest in the SWRI contract at the MGEX. I suspect it may have something to do with the CME/CBOT soft wheat contract, which has become the poster child for cash/futures convergence problems in “traditional” futures contracts.

The Minneapolis contract has a long ways to go before it overtakes the Chicago contract (330,000 contracts open) to become the main pricing vehicle for soft wheat, but this is a very interesting situation that I intend to watch closely in the months ahead.

You can learn more about the MGEX index contracts here.

New on the market and just in time for the holidays: the Rationalizer, an EmoBracelet and bowl combination set. It was designed for stock traders, but it must work for the stressed-out grain seller too.

 

 

Philips Electronics developed the Rationalizer to sense traders’ stress levels.  The EmoBracelet senses stress and makes an accompanying lighted bowl change colors. It flickers from yellow to red as emotions become more intense.

Philips researchers found home investors (that includes you commodity traders and marketers) do not act purely rationally - behavior is influenced by emotions, most notably fear and greed [my emphasis added], which can compromise the ability to make an objective decision. The Rationalizer will let you know when you need a break.

If you’re over-excited or over-stressed the bracelet will send messages to the bowl which will then start glowing. Geert Christiaansen, Philips’ Weird Stuff head honcho, calls it a “Galvanic skin response sensor. It’s a nice way of saying it measures the way you sweat.”

What is amusing about the Rationalizer is that it works better with man. And you know why? “Women are less emotional investors,” says some bloke at ABN Amro. 

Concerning the last comment, “Women are less emotional investors,” truer words have rarely been uttered. Women are emotional, but they tend to be emotional about family related issues. Men are emotional about financial issues, and that is not an asset when making financial/trading/pricing decisions.

I found a short video on the Rationalizer here. I went Amazon.com but could not find it listed for sale. If you find it available, please let me know. I just found the perfect Christmas gift.

This fall I began my third year as a columnist for Corn & Soybean Digest. I like to think that my blog readers know that I write a monthly column, but sometimes I am guilty of assuming too much. You can find current and past columns at the CSD website noted here. The challenge in writing a column is twofold; (1) have a point and, (2) make it in 500 words or less. An interesting graphic is also helpful.

My editor is Susan Winsor, who is accompanied by associate editor, Jennifer Bennett. They are nice people to work with, despite the fact that they often edit out my best humor.

Cash corn prices bottomed out in September at about $2.75 per bushel in Southern Minnesota. Today, you can find bids as high as $3.60 with most elevators closer to $3.40 per bushel (the highest bids, I suspect, come from elevators caught short in a late harvest).

Cash soybean prices were as low as $8.40 per bushel less than two weeks ago. Today you can sell soybeans for $9.50-9.60 per bushel. Even spring wheat prices are 50 cents higher than mid-September lows.

The latest rally gives new life to the “undercontracted.”

Though it seems counterintuitive, harvest-time rallies in grain prices are not rare. Many analysts are trying to explain the rally with talk of a late harvest, good demand, less than stellar early harvest reports, etc. In my opinion, it goes back to activity and trends in outside markets. The dollar is tanking, the stock market is strong, gold is strong and the energy complex is strong.

In the end, the reason why is not important. When a plate of cookies is set in front of you, do you stop to ask “Why?” or do you grab as many as you can?

For the undercontracted grain producer, this harvest rally is a chance to get a few cookies.

Peter Paperfarmer

Yesterday I started to address the marketing dilemma faced by too many producers on the eve of the 2009 harvest: a large crop is on its way and they are “undercontracted” for new crop delivery. What marketing alternatives are available to the undercontracted farmer?

For producers with on-farm storage, I discussed the “put it storage and pray for a rally” strategy. While it is not a cinch to make money, history (and May Sellers performance) suggests pretty good odds. But this is a big crop – what should we do with bushels where on-farm storage is no longer an alternative?

Let’s meet Peter Paperfarmer, my celebrity producer who illustrates the ever-popular strategy of re-ownership with call options. Every harvest, Peter sells his corn and soybeans off the combine, then re-owns the crop with an at-the-money July call option. He holds the options until it expires in mid-June. Peter’s performance over the last two decades (1989-2008)  is decidedly mixed, depending on whether we talk corn or soybeans, and whether we talk large or small carrying charge markets. (FYI, you can find Peter and all of my celebrity producers here.)

In corn, Peter’s re-ownership strategy made money in 4 of 20 years, or 20% of the years. It is interesting to note that, on average, Peter made money on options over the past two decades, thanks to one incredible year (2007) where a $2.75 per bushel profit more than made up for a string of 15-20 cent losses. At-the-money July’10 corn calls currently cost a little less than 40 cents per bushel.

Peter’s record in soybeans is very different. Peter profited from re-ownership in half of the years, including 7 of the past 8 years. Since 2000, the premium paid for an at-the-money call option varied widely, from 30 cents to $1.21 per bushel last year.

The conclusion looks simple enough; avoid re-ownership strategies in corn and give them a serious look in soybeans. However, we can take our understanding of Peter’s success deeper by differentiating between “large carry” and “small carry” years. Large carrying charges – defined here as the carry from December to July futures greater than 140% of interest costs – are common in the corn market (15 of the last 20 years) and uncommon in soybeans (no years).

In 15 years when carrying charges were large in corn, Peter’s re-ownership strategy made money twice. Peter’s record of success was not good in corn, and concentrating on large carry years just made it worse. And this year? Carrying charges in the corn market are very large, while they are small (as usual) in the soybean market.

My understanding is deeper but the conclusion remains the same; avoid re-ownership strategies in large carry markets (often in corn) and give them a look in small carry markets (the norm in soybeans).  As you consider re-ownership in soybeans, keep in mind that an at-the-money July’10 call will cost more than 80 cents per bushel, and that past performance is no guarantee of future results.