Five Common Mistakes in Grain Marketing

2020 Minnesota Crop Insurance Conference

Edward Usset, Grain Marketing Economist University of Minnesota Columnist, Corn & Soybean Digest & Farm Futures [email protected] www.cffm.umn.edu

Grain Marketing is Simple

Behold a seasonal price pattern that has held true for decades!

based on MN corn prices received by farmers

Cash soybean prices are, on average, lowest at harvest and highest in the spring.

based on MN soybeans prices received by farmers

Monthly prices: USDA/NASS

Futures prices: CME Group closing prices

Cash prices: Corn and soybeans: Pipestone MN Average Iowa prices, 1990-2019

Spring wheat: Red River Valley, 1990-2019

N = 30 and No replication crisis

A Different Approach to Marketing What is a Marketing Plan? A marketing plan is a proactive strategy to price your grain that considers your financial goals, cash flow needs, price objectives, storage capacity, crop insurance coverage, anticipated production, and appetite for risk Proactive, not reactive, not overactive

Barney has no marketing plan, no storage and no interest in early pricing. He is our benchmark - his price is the harvest price each year.

Five Common Mistakes in Grain Marketing

1. The reluctance towards pre-harvest pricing 2. Failure to understand and track your basis 3. Lack of an exit strategy 4. Holding grain in storage too long 5. Thinking you avoid storage costs when you sell grain and buy a call

(featuring Terry Timer)

Are there any seasonal tendencies in futures prices that would favor pre-harvest pricing?

Terry Timer

Terry pays attention to the seasonal highs in new crop futures prices by pricing 25% increments in March, April and May. In 2021, she won’t sell Dec corn <$4.25, Nov soybeans <$9.75.

Copyright © 2019 Center for Farm Financial Management, University of Minnesota. All Rights Reserved. Year 1-May 1-Oct Change 2000 2.62 1.99 (0.63) 2001 2.27 2.11 (0.16) 2002 2.20 2.56 0.36 CBOT December Corn 2003 2.33 2.20 (0.13) 2004 3.17 2.06 (1.11) Futures, 2000-2020 2005 2.27 2.06 (0.21) 2006 2.72 2.68 (0.04) 15 years (75%) the market 2007 3.79 3.69 (0.10) declined 2008 6.32 4.84 (1.48) 2009 4.33 3.41 (0.93) 5 years (25%) the market 2010 3.92 4.66 0.74 improved 2011 6.61 5.93 (0.69) 2012 5.39 7.57 2.18 2013 5.51 4.39 (1.12) 2014 5.00 3.21 (1.78) 2015 3.80 3.89 0.09 2016 3.97 3.37 (0.60) 2017 3.95 3.52 (0.43) 2018 4.20 3.66 (0.54) 2019 3.86 3.93 0.06 2020 3.37 Average 3.91 3.58 (0.33)

Don’t forget to sell something!

but remember your minimum price...

Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved. Year 1-May 1-Oct Change 2000 5.80 4.90 (0.90) 2001 4.34 4.52 0.18 2002 4.56 5.42 0.86 CBOT November Soybean 2003 5.53 6.87 1.34 2004 7.45 5.35 (2.10) Futures, 2000-2020 2005 6.22 5.73 (0.49) 2006 6.26 5.45 (0.81) 12 years (60%) the market 2007 7.84 9.92 2.08 declined 2008 11.93 10.53 (1.40) 2009 9.71 9.18 (0.53) 8 years (40%) the market 2010 9.76 10.57 0.81 2011 13.74 11.79 (1.95) improved 2012 13.93 15.60 1.68 2013 12.09 12.68 0.59 2014 12.26 9.17 (3.09) 2015 9.41 8.77 (0.64) 2016 10.18 9.54 (0.64) 2017 9.65 9.57 (0.07) 2018 10.51 8.58 (1.93) 2019 8.73 9.20 0.47 2020 8.55 Average 8.99 8.67 (0.33)

Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved. Year 1-May 1-Oct Change 2000 5.80 4.90 (0.90) 2001 4.34 4.52 0.18 2002 4.56 5.42 0.86 CBOT November Soybean 2003 5.53 6.87 1.34 2004 7.45 5.35 (2.10) Futures, 2000-2020 2005 6.22 5.73 (0.49) 2006 6.26 5.45 (0.81) 12 years (60%) the market 2007 7.84 9.92 2.08 declined 2008 11.93 10.53 (1.40) 2009 9.71 9.18 (0.53) 8 years (40%) the market 2010 9.76 10.57 0.81 2011 13.74 11.79 (1.95) improved 2012 13.93 15.60 1.68 2013 12.09 12.68 0.59 2014 12.26 9.17 (3.09) Soybeans show the need 2015 9.41 8.77 (0.64) 2016 10.18 9.54 (0.64) for a minimum price! 2017 9.65 9.57 (0.07) 2018 10.51 8.58 (1.93) 2019 8.73 9.20 0.47 2020 8.55 Average 8.99 8.67 (0.33)

Year 1-May 1-Oct Change 2000 5.80 4.90 (0.90) 2001 4.34 4.52 0.18 2002 4.56 5.42 0.86 CBOT November Soybean 2003 5.53 6.87 1.34 2004 7.45 5.35 (2.10) Futures, 2000-2020 2005 6.22 5.73 (0.49) 2006 6.26 5.45 (0.81) 12 years (71%) the market 2007 7.84 9.92 2.08 declined 2008 11.93 10.53 (1.40) 2009 9.71 9.18 (0.53) 8 5 years (29%) the 2010 9.76 10.57 0.81 2011 13.74 11.79 (1.95) market improved 2012 13.93 15.60 1.68 2013 12.09 12.68 0.59 2014 12.26 9.17 (3.09) Remove years when Nov 2015 9.41 8.77 (0.64) 2016 10.18 9.54 (0.64) beans were clearly below 2017 9.65 9.57 (0.07) production costs on May 1 2018 10.51 8.58 (1.93) 2019 8.73 9.20 0.47 2020 8.55 Average 9.54 9.07 (0.47) Year 1-May 1-Aug Change 2000 3.35 2.97 (0.38) 2001 3.47 3.16 (0.31) 2002 3.01 3.80 0.80 2003 3.39 3.70 0.32 MGEX September Spring 2004 4.24 3.53 (0.71) Wheat, 2000-2020 2005 3.46 3.50 0.04 2006 4.28 4.69 0.40 12 years (60%) the market 2007 5.24 6.32 1.08 2008 8.77 8.74 (0.03) declined 2009 6.77 6.05 (0.72) 2010 5.49 7.13 1.64 8 years (40%) the market 2011 9.34 8.34 (1.00) improved 2012 7.75 9.38 1.63 2013 8.19 7.42 (0.77) 2014 7.72 6.16 (1.56) 2015 5.45 5.17 (0.28) 2016 5.57 4.85 (0.73) 2017 5.68 7.18 1.51 2018 6.29 6.08 (0.21) 2019 5.21 5.19 (0.03) 2020 5.18 Average 5.63 5.67 0.03

Year 1-May 1-Aug Change Wheat also shows the 2000 3.35 2.97 (0.38) need for a minimum price! 2001 3.47 3.16 (0.31) 2002 3.01 3.80 0.80 2003 3.39 3.70 0.32 MGEX September Spring 2004 4.24 3.53 (0.71) Wheat, 2000-2020 2005 3.46 3.50 0.04 2006 4.28 4.69 0.40 2007 5.24 6.32 1.08 2008 8.77 8.74 (0.03) 2009 6.77 6.05 (0.72) Let’s exclude 11 years 2010 5.49 7.13 1.64 2011 9.34 8.34 (1.00) when the selling price 2012 7.75 9.38 1.63 on May 1 was less than 2013 8.19 7.42 (0.77) 2014 7.72 6.16 (1.56) production costs. 2015 5.45 5.17 (0.28) 2016 5.57 4.85 (0.73) 2017 5.68 7.18 1.51 2018 6.29 6.08 (0.21) 2019 5.21 5.19 (0.03) 2020 5.18 Average 5.63 5.67 0.03 Year 1-May 1-Aug Change MGEX September Spring 2004 4.24 3.53 (0.71) Wheat, 2000-2020 2006 4.28 4.69 0.40 2007 5.24 6.32 1.08 7 years (70%) the market 2008 8.77 8.74 (0.03) 2009 6.77 6.05 (0.72) declined 2011 9.34 8.34 (1.00) 2012 7.75 9.38 1.63 3 years (30%) the market 2013 8.19 7.42 (0.77) improved 2014 7.72 6.16 (1.56) 2018 6.29 6.08 (0.21) Average 6.86 6.67 (0.19)

September MGEX Spring Wheat Futures, 1990-2019 107 Don’t forget to sell something! 106

105

104 1-Jun 1-May

103 1-Mar 1-Apr

102 1-Feb Index (January 1 = 100) Index

101 1-Jul

100

Years when May 1 price is higher than production 99 1-Jan costs (excludes 91,93,94,99‐2003,05,10,15‐17,19) 1-Aug 1-Sep

Terry’s > / = to Terry Barney advantage Barney Corn 3.07 2.91 0.16 25/30 years Soybeans 7.49 7.18 0.31 21/30 years HRS Wheat 4.74 4.62 0.12 23/30 years Barney Binless represents the harvest price. Terry is only willing to price insured bushels, or up to 75% of her crop, if the price opportunity is above production costs. For the record, Terry made no pre-harvest sales (i.e., Terry = Barney) in 7 years in corn, 6 years in soybeans, and 9 years in wheat.

Copyright © 2019 Center for Farm Financial Management, University of Minnesota. All Rights Reserved. The Iowa department of agriculture estimates more than 57 million bushels of permanently licensed grain storage was seriously damaged or destroyed. (as of December 2019, Iowa had 1.51 bb of off-farm storage capacity, and 2.1 bb of on-farm capacity.

Market analyst Arlan Suderman estimates the loss at 200 - 400 million bushels. Damaging winds were felt over about 6.5 million acres of corn. His estimate factors in the benefit of the rain that fell in some of the very dry areas of Iowa.

Five Common Mistakes in Grain Marketing

no celebrity!

None of my celebrity producers does a good job of speaking to the important subject of basis and the impact it can have on grain marketing decisions.

Mistake #2 Failure to understand and track your basis

cash price - futures price = basis

In the grain trade, cash prices are quoted as a basis of so many cents "under" or "over" the futures price. This practice goes back over 100 years.

 Basis links the “general” (futures prices) to the “specific” (local cash prices)

 Key basis factors include…. • transportation costs and availability • local supply and demand for the grain, and for grain storage

 Grain basis patterns are broadly similar from one year to the next

…reach highs in late spring

…and slide back toward harvest levels in summer

Basis tends to be weakest at harvest Red River Valley Nearby Wheat Basis, 2000-2018 $0.00

Nearby Basis = Cash Price - Nearby Wheat Futures

($0.10)

($0.20)

($0.30) $/bu. under nearby spring wheat futures

($0.40)

($0.50)

Mistake #2 Failure to understand and track your basis

Basis continues to evolve and change. Keep up with the changes. You must have an opinion!

Mistake #3 Lack of an exit strategy

May Sellers

May has on-farm storage. Every year she holds her crop in the bin to sell in late spring. Her price is the cash price in the month of May, less storage costs.

Do you have unpriced grain in the bin? May Sellers has an exit strategy. Do you have an exit strategy?

May vs. Barney, 1990‐2019

May’s > / = to May Barney advantage Barney Corn 3.07 2.91 0.16 18/30 years Soybeans 7.70 7.18 0.52 21/30 years HRS Wheat 4.75 4.62 0.13 19/30 years

Barney Binless represents the harvest price. Due to storage limitations, May sells 20% of her grain at harvest, and this sale is part of his average price. May’s results are net of on-farm storage costs.

based on MN corn prices received by farmers

Copyright © 2019 Center for Farm Financial Management, University of Minnesota. All Rights Reserved. • A premier on-line trading game, featuring real time cash, futures and options quotes • Unlike other trading platforms, Commodity Challenge highlights marketing decisions and risk management tools (not speculation) • Mobile-friendly, educational and free!

www.commoditychallenge.com

• New in 2020! • Getting Started with Commodity Challenge • An online course featuring 16 video lessons

https://learn.commoditychallenge.com/ Five Common Mistakes in Grain Marketing

Mistake #4 Holding grain in storage too long

Hank Holder

Hank is our perennial bull, always convinced that prices are about to surge higher. But Hank only has enough storage for one crop, so each year he is forced to sell the previous years’ crop right before harvest, to make room for the new crop. His price is the following harvest price, less storage costs.

Hank Holder

Hank breaks… The 11th Commandment of Grain Marketing

“Thou shall not hold unpriced corn or soybeans in the bin beyond July 1”

June 1 for spring wheat

In corn, a narrowing basis pulls cash prices higher after harvest…

Copyright © 2019 Center for Farm Financial Management, University of Minnesota. All Rights Reserved. …while basis erosion and a seasonal decline in futures drag cash prices lower starting in early summer

Barney may be our benchmark, but let’s compare Hank Holder to May Sellers – two producers doing the same thing.

Copyright © 2019 Center for Farm Financial Management, University of Minnesota. All Rights Reserved. May Sellers vs. Hank Holder How much harm can occur by holding… corn for 19 weeks? or, soybeans for 18 weeks? or, spring wheat for 37 weeks?

Hank vs. May, 1990‐2019

May’s > / = to Hank May Hank advantage Corn 3.07 2.67 0.40 22/30 years Soybeans 7.70 6.78 0.92 22/30 years HRS Wheat 4.75 4.38 0.37 21/30 years

Due to storage limitations, May and Hank sell 20% of their grain at harvest, and this sale is part of their average price. May and Hank’s results are net of on-farm storage costs. How much harm can occur? Too much!

Mistake #5 Thinking you avoid storage costs when you sell grain and buy a call Peter Paperfarmer

Peter has no storage, but he is convinced that it pays to “re-own” his crop with call options. He gets the harvest price each year, plus any profit or loss from buying an at-the-money call option at harvest and holding to expiration.

To understand the mistake in “paper farming” demands a clear understanding of carrying charges in the market.

What are carrying charges?

Mistake #5

CBOT Corn Futures October 18, 2013 What determines price differences July $4.70 between delivery months (e.g. December vs. March corn)? Is it expectations? May $4.62

March $4.54

Dec. $4.42 These price differences reflect market determined storage costs (aka carrying charges). Large carrying charges, where deferred contracts trade at a premium to nearby contracts, are common when free supplies are large.

CBOT Soybean Futures Oct 18, 2013 Nov. $12.91 Inverse Carrying Charges: An inverted market represents the opposite of a carrying charge market – deferred contracts trade at a discount to nearby Mar. $12.73 contracts.

May $12.57 Jul. $12.54

This occurs when supplies are small - a scarcity of stocks. The market says "we Aug. $12.42 will pay a premium if you deliver now!"

Peter Paperfarmer

30 years of data (1990-2019) and 3 different crops (corn, soybeans and wheat) = 90 chances to “re-own” with options after harvest

90 opportunities to “re-own” with options after harvest How often did it pay? 4 of 30 years in corn 13 of 30 years in soybeans 7 of 30 years in HRS wheat A tad better 24 of 90 years total (27%) than expected!

Peter Paperfarmer

How about years when the carry is large at harvest? 25 corn years 3 soybean years 14 wheat years Paper farming in 42 “large carry” years: Will this increase or decrease our odds for success with paper farming?

In a large carry market, …buy high paper farming asks you to… July $4.70

May $4.62

March $4.54

Dec. $4.42 …sell low and

Peter Paperfarmer

42 opportunities to “re-own” with options in large carry years… How often did it pay? 3 of 25 years in corn 2 of 3 years in soybeans 2 of 14 years in wheat 7 of 42 years total (17%)

How about years when the carry is small or inverted at harvest? 5 corn years 27 soybean years 16 wheat years Paper farming in 48 “small carry or inverted” years: Will this increase or decrease our odds for success with paper farming?

Mistake #5

Nov. $12.91 …sell high and

Mar. $12.73

May $12.57 Jul. $12.54 …buy low

Aug. $12.42

48 opportunities to “re-own” with options in small carry or inverted years… How often did it pay? 1 of 5 years in corn 11 of 27 years in soybeans 5 of 16 years in wheat 17 of 48 years total (35%)

Peter vs. Barney, 1990‐2019

Peter’s > / = to Peter Barney advantage Barney Corn 2.86 2.91 (0.05) 4/30 years Soybeans 7.42 7.18 0.27 13/30 years HRS Wheat 4.58 4.62 (0.04) 7/30 years

•Barney Binless represents the harvest price.

•Peter’s purchases ATM calls on July corn and soybeans on November 1 (May ATM wheat calls on September 1) and holds to expiration. Results are net of premium and brokerage costs.

Because carrying charges reflect a market determined storage cost, you cannot avoid storage costs by selling nearby and buying deferred futures contracts when carrying charges are positive.

July $4.70

May $4.62

March $4.54

Dec. $4.42

Mistake #5

Nov. $12.91

Mar. $12.73

May $12.57 Jul. $12.54

Aug. $12.42

Storage costs are only avoided if the market is inverted, a situation when paper farming makes some sense.

Copyright © 2019 Center for Farm Financial Management, University of Minnesota. All Rights Reserved. Corn 2021 Pre‐Harvest Marketing Plan Objective: Buy crop insurance to protect my production risk and price 75% of my anticipated corn crop (per APH yield) by late June. Price 10,000 bushels at $3.75 cash price ($4.25 Dec. futures) using forward contract/futures hedge/HTA contract Price 10,000 bushels at $4.05c/4.55f, or by March 29, pricing tool tbd Price 10,000 bushels at $4.35c/4.85f, or by April 27, pricing tool tbd Price 15,000 bushels at $4.65c/5.15f, or by May 26, pricing tool tbd Price 10,000 bushels at $4.95c/5.45f, or by June 10, pricing tool tbd Price 10,000 bushels at $5.25c/5.75f, or by June 24, pricing tool tbd Plan starts on January 1, 2021. Earlier sales may be made at a 40 cent premium and would be limited to 30,000 bushels. Ignore decision dates and make no sale if prices are lower than $3.75 local cash price/$4.25 December futures. Exit all options positions by mid-September 2021. Dec’21 @ $3.85

Soybeans 2021 Pre‐Harvest Marketing Plan Objective: Buy crop insurance to protect my production risk and price 75% of my anticipated soybean crop (per APH yield) by late June. Price 5,000 bushels at $9.00 cash price ($9.75 Nov. futures) using forward contract/futures hedge/HTA contract Price 5,000 bushels at $9.75c/10.50f, or April 27, pricing tool tbd Price 2,500 bushels at $10.50c/11.25f, or by May 26, pricing tool tbd Price 5,000 bushels at $11.25c/12.00f, or by June 24, pricing tool tbd Plan starts on January 1, 2021. Earlier sales may be made at a 75 cent premium and would be limited to 10,000 bushels. Ignore decision dates and make no sale if prices are lower than $9.00 local cash price/$9.75 November futures. Exit all options positions by mid-September 2021.

Nov’21 @ $9.50

• Sometimes we maximize profits, and sometimes we minimize losses • My preference is to price something (20-40%), even with prices less than costs. What’s your preference? • How to get $4 Corn

HOW TO GET $4 CORN ‐ workshop

3 hours long Play a simulation game - try to get $4 corn Meet some new friends Interested in sponsoring a workshop for your customers? Contact Edward Usset at [email protected]

Copyright © 2019 Center for Farm Financial Management, University of Minnesota. All Rights Reserved. Corn 2021 Pre‐Harvest Marketing Plan Objective: Buy crop insurance to protect my production risk and price 75% of my anticipated corn crop (per APH yield) by late June. Price 10,000 bushels at $3.75 cash price ($4.25 Dec. futures) using forward contract/futures hedge/HTA contract Price 10,000 bushels at $4.05c/4.55f, or by March 29, pricing tool tbd Price 10,000 bushelsCan at $4.35c/4.85f,you start at or somethingby April 27, pricing tool tbd Price 15,000 bushels at $4.65c/5.15f, or by May 26, pricing tool tbd Price 10,000 bushelsless atthan $4.95c/5.45f, your minimum or by June 10,price? pricing tool tbd Price 10,000 bushels at $5.25c/5.75f,Yes! or by June 24, pricing tool tbd Plan starts on January 1, 2021. Earlier sales may be made at a 40 cent premium and would be limited to 30,000 bushels. Ignore decision dates and make no sale if prices are lower than $3.75 local cash price/$4.25 December futures. Exit all options positions by mid-September 2021.

Why is an imperfect plan better than no plan at all?

• A plan is a benchmark for goals – it gives you something to adapt in a changing environment

Copyright © 2019 Center for Farm Financial Management, University of Minnesota. All Rights Reserved. Five Common Mistakes in Grain Marketing What did we learn? Eliminate mistakes! Terry Timer showed us the value of pre- harvest marketing Know your local basis

Grain in the bin? May Sellers has an exit strategy. What is your exit strategy? Hank Holder pays the price for disobeying the 11th Commandment Peter Paperfarmer showed us the power of carrying charges

2020 Minnesota Crop Insurance Conference

Thank you!