Posted by: usset001 | September 18, 2012

Draft of my 2013 soybean pre-harvest marketing plan

Like corn, I am not ready to act but I am prepared to share a draft of my 2013 pre-harvest marketing plan for soybeans.

My minimum price objective is much higher than in 2012. If we make the assumption of no direct payments in 2013, that change alone adds 40 cents/bu to production costs. Rising land rent also raises the cost of production.

My pricing steps are separated by 70 cents/bu – much greater than the 40 cent intervals used last year. I’m trying to wrap my mind around a new era in prices and the need to adapt every aspect of my plans to a new normal.

I will not take action until I choose to take the “draft” designation off and call it final.


Responses

  1. The American hog farmer is still waiting for this “new era” in prices. With the fact that August just set a new all time high with expense per hog coupled with cash hogs that are now in the upper forties, I think any “plan” that doesn’t take into account the economic law that abnormal returns will return to normal is flawed at best, and foolish at worst. Supply and demand shows that December 2013 futures are trading a mid 140’s national average, i.e. 20 bushels below “trend”. Yes, I know trend is some what of a misnomer, but with what we saw this year with yields in what was one of the worst summers production ag has ever seen, a person has to keep in mind the possible yields that can be produced on the upside, i.e. the bear scenario. When one considers that profits can be protected RIGHT NOW with the upside being left open, albeit for a cost, how can a plan that waits for prices to rally at 70 cent clips (or 40 cent clips for that matter) and defies what history shows happens post drought years be anything but pure folly? This isn’t a plan. It is wishful thinking. Can we have another drought? Absolutely. Can we plant 100 million acres of corn and have 160 plus yields? Sure. (As an aside, even with the latter and the resulting lower prices from where we are now, the price that eventually clears the market will more than likely be indicative of a “new era”. After all, isn’t high 3’s low 4’s higher than the old era?) The point is, both downside AND upside need to be protected.

    I bet that the majority of bankers who would see this plan would stamp a big fat NO on the loan request. And they should.

    • I think you are misreading how my approach is intended to work. Concerning price objectives, I always tell producers that the most important price objective in my pre-harvest marketing plan is the minimum price objective ($5.50 Dec’13 corn and $11.80 Nov’13 soybeans). This figure should reflect local production costs. If it is set unreasonably high, you run the risk of doing nothing (not this year, however). Set it too low and you are doing too much at a loss.

      In contrast to the minimum price, I also tell producers that my higher and maximum price objectives (those levels that rise at 40 or 70 cent clips) are the least important part of the plan. I ask only that they be realistic – they may seem grand but my figures are in-line with the type of price spikes we’ve seen in 3 of the last 5 years. Why are these objectives unimportant? Because of the decision dates in my plan. After each of these lofty price targets is a date, where I am committed to take action whether or not prices reached my lofty goals. One caveat: the price on a decision date must be higher than my minimum price objective (another reason it is so important).

      These are lofty and profitable prices. I agree that margins will not stay this high forever. But there is still a place for patience. I note that the Dec’12 contract is off about 70-80 cents from its recent highs. However, the Dec’13 contract (the one addressed in this plan) is off just 20 cents, or 3%. I think we can still exercise some patience, and I long ago purged myself of the notion that somehow I would sell the high in the market.

      By the way, I am aware of a number of farmers who have taken my plan and handed it to their banker who insisted on having one.

  2. To put this in another light, I will relay a conversation I had with a friend of mine. He contended that he couldn’t forward sell anything unless given a profit, and that the market always allowed that to occur. I attempted (I still don’t know if I did so successfully) to illustrate to him that what he said was in defiance of the basic economic law of supply and demand. In essence, if a producer of a commodity or any product was at all times able to capture a profit, what would cause a producers to do anything but increase production infinitly? Sure, there would be those that weren’t inefficient, but their slack would more than be taken over by the bigger, more efficient producers? Of course, in the real world this is not the case. The old adage “The bigger the bull the bigger the bear” is illustrative of the pendulum that swings from excess demand to excess supply, meeting (briefly) at the supply = demand point where quantity supplied equals quantity demanded. Case in point: from mid 1998 to late 1999, there was no where to lock in a profit for hogs. What did the market do? Liquidation occurred, and in 2000 the market rebounded, We are seeing the same thing occur in grain now, with Mother Nature of course being the final arbituer. We know that world wide we are gearing up to plant and produce at an incredible level due to high demand and lower supply. A producer has to realize the backdrop of economic uncertainty (reduced demand) coupled with the real possibility of a dramatic rebound in supply. We go from the left side of supply demand to the right side. A producer had better be prepared for this.

    • I agree that these good times cannot go on forever. I feel most for the newcomer to grain production – the one who has know nothing but good prices and hefty margins. It will be a challenge for them when the bear returns.

  3. I had failed to see the “or” in your plan, as in a price “or” the date, whichever comes first. My apologies. I still think “piece mealing” it with arbitrary dates is too “random walky” for my taste, but it definitely is much much MUCH better than doing nothing, which unfortunately is from what all indications are what farmers are doing. An old grain merchandiser told me that markets will move in the direction that hurts the most people. This is very foretelling to me in the current environment.


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