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Choosing a marketing consultant POSTED: June 25, 2007 Someone asks: What are some things a grower should consider when choosing a marketing consultant? Ed replies: I encourage producers to consider hiring a marketing consultant. After all, many have already hired an agronomy specialist, a tax preparer, and a financial planner. It’s a good idea to seek help in areas of management where we are not comfortable with our own level of knowledge and experience. Producers should try to select a marketing consultant with a similar mindset and approach to marketing as their own. In other words, if you are a relatively conservative marketer, it probably makes no sense to select a consultant who tends towards hyperactive in the use of options, and someone who likes to re-buy and re-sell often. Find someone who can market your grain in a style that makes sense to you. In order to assess your consultant’s performance, track a baseline price of cash grain prices in your local market for every crop year. I like to start tracking a baseline price in January (8 months before harvest) and end in June after harvest (10 months after harvest). Now see if your paid consultant can beat that average. No one can beat the average every year, but if your guy falls short two or three years in a row, it’s time to find another consultant. And don’t forget to take into consideration their transactions costs and marketing fees in the equation. I think the price used to compare to a baseline price should be net of transactions costs and marketing fees. Did I get $3.00 per bushel of corn before or after transactions costs and marketing fees? Depending on the advisor, transactions costs and marketing fees might be 5 cents or 35 cents per year (the active use of options can ring up a large bill quickly). I also want to note that hiring a marketing consultant is not an excuse for ignorance of market issues, marketing tools, and general trends in the market. You should expect your consultant to be able to explain the strategy in place, share some specifics on price objectives and timing, and to explain the downside of the strategy in place. You should be able to understand every detail. Let them do their work (that’s why you pay them) but know what’s going on in the marketing of your crop. POSTED: June 25, 2007 Bob asks: When would you roll your Dec’07 corn HTA's to the July 2008 contract? It has recently traded as wide as 19 cents. Ed replies :I’m not ready to roll my hedges forward at this time. If we get a “normal” to large corn crop (the jury is still out), then I expect the Dec/July spread to widen further. If the crop is above average in yield per acre, it would not surprise me to see a carry from Dec to July approaching or exceeding 30 cents per bushel. If the crop is small (hot and dry!), all bets are off. POSTED: February 13, 2007 From Ed-- Grain Marketers, The last four months have been quite a ride. Just a few weeks ago someone posed an interesting question. “Have you ever looked at similar years to this year - years where futures prices rallied during harvest? What do these other years tell us about the months and year ahead?” This is a great question but I may have a problem finding the answer because THERE ARE NO SIMILAR YEARS TO THIS YEAR. Oh, we’ve had price rallies during harvest, modest ones of 20-30 cents in corn, but nothing like the $1 plus rally we saw from mid-September to mid-November (and continuing higher since then). We are sailing in uncharted waters. I thought I saw this ethanol thing coming two years ago, but the market acts like it showed up as an unexpected guest in October. The market has been scrambling to make room for our guest ever since. What to do and how to adapt. Before the price rally began I was about 1/3 sold on 2007 new crop corn and soybeans (too early and too cheap – my hindsight is 20/20 too). Instead of worrying about selling decisions already made, I choose to look ahead to some great opportunities for the rest of my 2007 crop, not to mention the great prices out ahead in 2008 and 2009. For the balance of my 2007 pre-harvest sales, I have decided to defer those sales until I reach my decision dates in spring (April thru early June). This move is not without precedent: I used the same ploy in pre-harvest sales of soybeans in the first half of 2004. I’ve looked at enough history to say that I am reasonably confident (but far from certain) that as good as prices are today, my pricing opportunities may be even better in the spring. Clearly I am taking a risk – the $3.90 Dec’07 price that we look at today could easily be 50 cents lower in 3-4 months. The same is true of November soybeans at the current $7.65 per bushel price. I do my best to manage risk, but some risk cannot be avoided. Concerning 2008 sales, I still haven’t written marketing plans for any crops. I intend to write them soon (in the next 4 weeks?) and you can count on a few changes. Minimum pricing objectives must be moved higher to adapt to the realities of higher production costs (particularly fuel, fertilizer and rent). I am leaning towards minimum pricing objectives of $2.80 (maybe $2.90) December corn, $6.00 November soybeans, and $3.80 September spring wheat. These figures are at least 20 cents per bushel higher than current minimum prices. I also intend to stretch out the intervals between sales. For example, my corn sales may have 15 cent intervals versus the 12 cents used in years past. And don’t forget an early sales premium of 30 cents or better for sales made more than 1 year in advance. Once my plans for 2008 are posted, I will probably be 30% sold for that crop year (and I will continue to limit my sales to 1/3 of my expected crop more than one year in advance of harvest). It is hard to imagine how I could deeply regret an early sale of about $3 cash corn for 2008 delivery. I suspect that there are a number of producers who may be feeling the pang of “too early and too cheap” on some 2007 and 2008 sales. Let me share something I read that reminded me of my goal in grain marketing. I am not trying to sell the highest price in the market – I am trying to get a good average price. In the most recent AGMAS report (http://www.farmdoc.uiuc.edu/agmas/reports/06_04/AgMAS06_04.pdf ), I learned that for the 2004 crop year, the average cash corn price received by 27 professional advisory services was $2.40 per bushel. The highest cash price available to anyone that year was about $3.20 per bushel (that’s based upon a Dec’04 high closing price of $3.37 per bushel in April of 2004, and assuming a 17 under basis for Southern Illinois). Think about it: the “pros” (and many more of us) missed the high by 80 cents a bushel – 25%!! But $2.40 cash corn was a good average price in 2004. Maybe that sale you made at $2.90 Dec’07 corn (vs. $3.90 today) isn’t as bad as you think. Keep spreading out your sales and move that good average higher. You can find the specifics on all of my pre and post-harvest marketing plans on our new and improved website http://www.cffm.umn.edu/GrainMarketing/MarketingPlans.aspx . Stay cool. Ethanol Boom... Marketing Bust? POSTED: February 12, 2007 From Ed-- The ethanol train is running full tilt down the tracks with no signs of losing momentum. Nearly twice a month we’re reading another press release announcing the latest plant to ramp up production. Demand for corn to fuel these plants is riding the same train. You make a living growing corn and other crops to sell. Corn prices are higher and you have great pricing opportunities today (and two and three years out). Your prospects look great for some profitable years ahead. Corn producers should be celebrating but I sense a rising level of anxiety. Is the anxiety you feel caused by a little voice that reminds you not to stand in front of a train? Let’s look at a few numbers. Corn demand for ethanol is slated to top 2.1 billion bushels in the 2006/2007 crop year, more than twice the level of just four years ago. USDA is struggling to keep up with the changes. Since they began tracking it in 2003, can you recall a USDA report when the projected corn usage for ethanol was revised lower? While you ponder that question, let me give you another fact to consider. We just finished the harvest of one of the best corn crops ever produced in this country, and corn demand will outpace our bountiful production by 1 billion bushels in the 2006/2007 crop year. Economics 101 teaches us that higher demand = higher prices. What more needs to be said? What’s a grain marketer to do? A year ago you would have given anything for $3 corn. Now that you have it, your emotions want to throw out your pricing plan and ride this market higher. You are tempted to fill every available storage bin with unpriced corn and “re-own” earlier sales with call options. It’s equally tempting to throw out our pre-harvest marketing ideas for 2007 and 2008. Let’s step back and see if we can make some sense of this market. We need to remind ourselves that the current price of corn is very good by any standard. Since 1980, there have been 9 years when the July corn contract was trading above $2.90 per bushel at harvest (a local cash price of $2.50 or higher at harvest). In 8 of these 9 years prices traded lower (sometimes much lower) into the next summer. The one exception was 1995/96, when high corn prices at harvest exploded the following spring. “This year is different” has become a mantra and while I concede that the momentum from growing ethanol production is unprecedented, all of these years had something “different” that drove prices higher. Economics 101 also teaches us that higher prices will eventually dampen demand and encourage more production. We also need to remind ourselves that “defending the upside” (a popular and curious phrase) in a rising market is incredibly easy to do. Just grab your cell phone and call a broker, then give the order to buy call options. But be forewarned that buying options in this volatile market will be costly. I have a good friend named Peter Paperfarmer who likes to sell his corn production at harvest and re-own his grain with call options. Between 1998 and 2005, Peter would pay 12-18 cents per bushel to buy an at-the-money July call option on November 1 (July futures were in the $2.20 - $2.60 range each year). On November 1 of this year, July corn futures closed at $3.60 per bushel and a 360 call will cost Peter 35 cents per bushel. Defending the upside will be expensive this year. As the ethanol train speeds along, let me offer some specific ideas for pricing your recently harvested corn crop.
Now consider a few ideas to keep your pre-harvest marketing plans active.
Don’t let the ethanol boom “bust” your marketing plans. Try some of these ideas to adapt your marketing plans to an extraordinary time. POSTED: May 22, 2006 From Ed-- Grain Marketers, If grain buyers enjoy a wide basis, then today they must feel like a lottery winner. It is difficult to find a time when basis levels were so wide (aka weak, aka low) during the month of May. Unfortunately, today I wear a different hat. Now I think like a farmer - a grain seller - and grain sellers love a strong basis and suffer when the basis is weak. "I Got the Basis Blues" all over again. Let's look at some numbers from yesterday. The nearby corn basis in my neck of the woods (Southwestern Minnesota) was quoted at 59 cents under the Chicago July futures price. 59 under!! One year ago I was looking at a basis of 35 cents under the July. Let me say it in English - If you were enjoying last years basis today, your nearby corn bid would be about $2.25 per bushel, and not the $2.00 per bushel you are seeing today. In May of 2004, the nearby corn basis was 21 cents under (that would translate into a cash price for corn today near $2.40 per bushel - tears are welling in my eyes). Since 1990, the worst basis experienced during the month of May was 43 under the July in 2000. We are 16 cents worse than the worst. The corn basis looks healthy compared to the soybean basis. I am currently quoted 69 cents under the Chicago July futures price for nearby delivery of soybeans. One year ago I was looking at a nearby basis of 8-10 cents under the July - a mere 60 cents better. Many of you are looking at a soybean price of about $5.30 per bushel today - take last years basis and your bid would be closer to $5.90 per bushel. The worst mid-May soybean basis I've seen over the last ten years was 45 cents under in 2000. In soybeans, the current basis is 25 cents worse than the worst. I can try to explain why but any explanations will not make up for the price discounts. Barge rates are higher, and higher transportation rates lead to a wider basis. The die was cast last fall when Hurricane Katrina shut down the river system and backed up grain movement. The basis for corn and soybeans tanked and it has never really recovered since then. For holders of unpriced grain in the bin, this wide basis in corn has been frustrating. Thanks to rising futures prices, cash corn prices are 50-60 cents higher today than harvest. But if the basis weren't so poor, you would have another 25 cents in your pocket. For people who "sold the carry" (locked in the July futures price at harvest, waiting for a narrowing basis) the current basis situation is nothing short of a disaster. Right now, I would consider a root canal from my dentist as a "pick-me-up" event. Something is out of whack. Weak basis levels and wide carrying charges scream "too much grain", even as futures prices, particularly wheat an corn, seek higher levels. Thank God for the "funds" (commodity funds, investment funds, hedge funds, inflation beating funds - whatever you want to call them). They think we are running out of grain - please don't tell them about the open piles of corn that are still in the country from last fall. Things don't stay out of whack forever. Something will change in the months ahead. Either futures prices will fall sharply to reflect what the basis is saying (too much grain), or the cash market will finally "get it" and move sharply higher to reflect the economics indicated by the board. My bet is on the former but not because it's what I want (and I really, really want a better basis). It is my experience (and, I think, a shared experience of many cash grain traders) that when basis and futures start telling two different stories, it is the story told by the basis that will eventually prove true. Then again, I've been known to be remarkably wrong. If you don't believe me, see any one of my presentations from late last year on "how to sell the carry and benefit from a strong spring basis". My privileged position at the University prevents me from using four-letter words, but I have a couple of good ones in mind. This exceptionally wide basis does put a different spin on the 11th Commandment of Grain Marketing: "Thou shall not hold unpriced grain in the bin after July 1". The greatest price risk to holding unpriced grain in the bin beyond early summer is a basis risk. There is a very strong history of basis levels in corn, soybeans and spring wheat declining from July to harvest. But think about the nearby basis relative to new crop futures prices and you will get a different sense of basis risk. The nearby corn basis is 59 cents under the July. Currently there is a 25 cent carry from the July contract to the December new crop contract. In other words, the current corn price is 84 cents under December! Do the same math with soybeans and you will learn that the current soybean price is 93 cents under November (69 cents under the July plus a 24 cent carry from July to November). I shutter to think that the corn or soybean basis at harvest will be that poor. In fact, current bids for new crop corn range from 55-60 under the December, and 70-80 cents under the November for soybeans (I'm telling myself, "No four-letter words, no four-letter words") in many parts of SW Minnesota. So the "11th Commandment" does not apply this year? Go back to my discussion of an "out of whack" market and the idea that something will change. If the board does decline sharply, the basis can improve and you can still suffer the ill affects of holding grain in storage too long. B. B. King ain't got nothing on me because I got the grain basis blues. POSTED: May 18, 2006 Bob asks: I have been considering pricing some of my 2008 corn crop. Dec 08 is trading over $3.10 per bushel. It seems very attractive compared to Dec 06. What will happen to the price if the "big" drought occurs this summer? What happened to the 2 year out contract back in 1996 when corn hit $5.00 per bushel? What's your perspective on $3+ opportunities? Ed replies: Your question has a number of interesting angles - let
me try to address them one at a time. What will happen to price [of 2007 or 2008 December futures] if the "big" drought occurs this summer? This is a very interesting question that calls for an analysis of "similar years", and there aren't many years like this year to consider. Our time horizon for starting and implementing a pre-harvest marketing plan is getting longer. Consider the first trading dates of the following new crop corn contracts... 1970: 1st trade occurred Dec 23, 1969, 12 months prior to expiration 1980: 1st trade occurred Sep 20, 1979, 15 months prior to expiration 1990: 1st trade occurred May 22, 1989, 19 months prior to expiration 2000: 1st trade occurred May 14, 1998, 31 months prior to expiration 2008: 1st trade occurred Dec 16, 2005, 36 months prior to expiration Looking two plus years out for a pricing opportunity is relatively new. The December 1989 contract was the first new crop corn contract to start trading more than 18 months prior to expiration. The December 1995 was the first to start trading 2 years prior to expiration, and the 2008 was the first to start trading 3 years prior to expiration. According to this information, the only similar years to this year (e.g. pricing 2008 in the spring of 2006) are 1998 forward. If we consider the question in a slightly different way - pricing new crop 1.5 years in advance (vs. 2.5 years) - we have a couple of interesting analogous years: pricing 1989 corn in the spring/summer of 1988 and pricing 1997 corn in the spring/summer of 1996. Pricing 1989 corn in spring/summer 1988: On May 24, 1988 (the first day of trading the Dec'89 contract), Dec'88 corn closed at $2.33 per bushel (I am rounding numbers to the nearest cent). The Dec'88 contract reached its' highest closing price on June 27, 1988 at $3.63 per bushel. You read that correctly - Dec'88 corn increased $1.40 per bushel in just over one month's time. During that same time period, the Dec'89 contract increased from $2.37 on May 24 to $2.83 on June 27, a 46 cent increase. In this particular situation, new crop prices (1988) outpaced new crop prices one year out (1989) at a pace of 3:1 (i.e. for every 3 cents the 1988 new crop increased, the new crop corn price for 1989 increased 1 cent). Pricing 1997 corn in spring/summer 1996: On May 1, 1996, Dec'96 corn closed at $3.37 per bushel. The Dec'96 contract reached its' highest closing price on July 12, 1996 at $3.84 per bushel. During that same time period, the Dec'97 contract increased from $2.96 on May 1 to $3.06 on July 12, a 10 cent increase. In this situation, new crop prices (1996) outpaced new crop prices one year out (1997) at a pace of about 5:1 (i.e. for every 5 cents the new crop increased, the new crop corn price one year out increased 1 cent). Based on a scant two years of history, I would "guesstimate" that a $1 increase in the Dec'06 price (for example, from the May 12 close of $2.82 to $3.82 per bushel) would be matched by a rise of 20-35 cents in the Dec'07 (from $3.13 to the $3.33-$3.48 range) and Dec'08 contracts (from $3.28 to the $3.48-$3.63 range). A more recent example can be found last year, even though I don't think it represents the type of powerful market move that's on your mind. From May 1 to a peak on July 18, Dec'05 prices increased 43 cents (from $2.27 to $2.70). Over the same period, Dec'06 prices increased 18 cents (from $2.44 to $2.62) - about a 2.5:1 ratio. Thanks for a great question. It helped me quantify some of the upside risk in a very early corn sale. Considerations in pricing grain two years out POSTED: May 04, 2006 Mike asks: I have been watching the Dec 2008 corn price move higher and I did make a sale at $2.94 using HTA. Should I be considering making more sales around the $3.00 range? Ed replies: Mike, you've asked a very timely question
that begs a larger question: How early and aggressive should a producer
be
in pre-harvest pricing? First let me answer your question by saying
that, as a rule, I am not willing to price more than 30% of a crop
more than one year in advance of harvest. For example, as of last
week I have taken steps to price 30% of my 2007 corn and soybean
crops (you can see my new crop plans at: http://www.cffm.umn.edu/GrainMarketing/MarketingPlans.aspx ).
With this done, I will be very reluctant to price any additional
'07 crop before the harvest of this year's crop. You're taking on
your 2008 crop, but I'm content for now just to watch it. Let's see
if I can explain my reasoning... Here's another concern. I know this year's crop insurance costs and base prices. Is it right to assume that the level of subsidy for crop insurance premiums will remain the same in 2007 (or 2008 - the year you are considering)? I also run the risk of having too many sales out of step with the base price. I could have a number of "great sales" on the books at $3.00 December corn - what if the base price in February 2008 is $3.68 per bushel? Too much pricing too early might put me at odds with the level of revenue coverage needed to survive a short crop. Let me offer one more concern: How would a big change in the farm program affect my planting decisions one or two years out? A question like this is simply impossible to answer, because I couldn't attempt to guess what big changes could occur. Stuff happens! Now that I have shared all my worries, it's worth thinking about the benefits of early pricing. If my early sales of 2007 corn and soybeans turn about to be my worst sales for that crop year, I can take comfort in the fact that my worst sales were made at prices that were better than 80% of the sales I have made over the past 5 years (maybe I should watch 2008 even closer). If you want to see a real tempting pre-harvest sale, look at 2007 September spring wheat futures. Make a sale at tonight's close of $4.44 per bushel and you will have a cash price better than about 98% of all pre or post harvest pricing opportunities since 1996. I intend to make this sale soon. But 30% pre-sold more than one year in advance remains my limit because stuff happens and I like to advocate patience. Keep in mind that even if tomorrow starts a persistent and steady price slide into the harvest of 2006 (as happened the last two years), I highly doubt that we will not see another good price rally and pricing opportunities (or two or three) before the harvests of 2007 and 2008. Protecting the upside on 06' corn POSTED: April 21, 2006 Brian asks: In Dr. Elywnn Taylor's most recent comments he stated that now that we have gone "La-Nina" and the most likely corn yield is 138 bpa. Dr. Robert Wisner uses the current USDA numbers and a yield of 138 bpa to forecast a harvest price $3.46 per bushel in Iowa. I know you do not like options, but given this new information should we be considering protecting the upside on current 06' corn sales? Ed replies: You are correct in your observation that I am not a
great fan of options. I am aware of the current La-Nina and the heightened
possibility of a smaller crop this summer. Maybe this is the year
to use options - let's look at some numbers. Let's consider your "paper farming" alternative. Last night, an at-the-money 270 December corn call settled at 24 cents per bushel. If you used an HTA at $2.69 1/2 and "re-owned" the contract with the 270 call, your worst case scenario at harvest is... $2.20 cash price - $.24 cost of the call - $.01 brokerage = $1.95 per bushel Markets can move three ways: up, down, or sideways. Two of those three scenarios - down and sideways - will result in the minimum price of about $1.95 per bushel. And if market prices rise, you are not necessarily profiting. The December futures price must rise above $2.95 per bushel before you can call the transaction "profitable". The move from $2.70 to $2.95 is needed just to get the money back from the cost of the call and brokerage ($2.70 + $.24 + $.01 = $2.95). One way to increase the minimum price in this equation is to pay heed to an old adage in the business, "never pay more than 10 cents for a call". At last night's closes, the first December corn call option priced less than 10 cents per bushel is the 330 December call. Plug this into the equation and you will find a much better minimum cash price: about $2.10 vs. $1.95 using the 270 call. The trade-off is a much higher breakeven price on the transaction - December corn needs to trade above the $3.40 per bushel mark ($3.30 call + $.09 premium + $.01 brokerage) before you start to see a profit. That is a mere 70 cents above the current market, or 25% higher than last night's close. Buying put options is another way to establish a minimum price and retain your upside potential. Put a pencil to those alternatives and you will discover scenarios for breakevens very similar to the call option strategies noted here. I think the numbers look even worse than usual in these examples due to high volatility in the market, which translates into higher than usual option premiums. I went to an on-line options calculator and discovered that the implied volatility of a 270 December corn call is over 30%, based on last night's closing premium of 24 cents. Implied volatility over 30% leads to premiums that are simply too rich for my taste. Option strategies can sound very appealing, but you can see how I lose most of my appetite whenever I run the numbers. Great marketing is finding an extra 10-20 cents and purchasing options have too many scenarios that lose 10-20 cents. As much as I dislike purchasing options, even I must admit that sometimes they pay. Maybe this is the year. Let me suggest that you set an options budget - a specific amount of money you are willing to spend (and lose) in pursuing the "upside", then stick to your budget. p.s. It may be helpful to keep in mind that even in La-Nina years, the odds of a "normal" crop (trend yield +/- 10%) are still better than 50% and closer to 65%. How does a "rolled" contract work? POSTED: April 13, 2006 Bill asks: Can you explain exactly how it works when you "roll" a contract to another delivery month. Say you're doing a HTA in the spring with the Dec'06 contract at $2.65 per bushel. At harvest you decide to roll it to July and now the Dec'06 futures price is $2.75 per bushel. Someone told me your price of $2.65 was locked in and all you could gain was a better basis. How does this work?
Let's use your example to explain the mechanics of rolling your hedge forward. First let's lay out the situation... * You've used an HTA contract in the spring to establish a December
2006 futures price of $2.65 This is how it works. Go to your elevator and express your desire to roll the hedge to the July contract. They will write a new contract using the July contract as the pricing base. What happens to your 10 cent "loss" in the December contract (sold at $2.65 in the spring, now trading at $2.75)? The loss is taken out of the July futures price, so instead of an HTA with July futures at the current market of $2.94 July, the contract will be written with the July contract at $2.84 ($2.94 actual adjusted for the 10 cent loss in the December). You will also negotiate a new delivery date at the same time. If your new delivery date is set for first-half June, and the basis improves to 38 under the July at that time, your final price for the corn will be $2.46 ($2.84 July futures base - $0.38 basis). If December futures are much lower at harvest (see the last several years) then your gain on the December futures price will be added to your July futures price at the time you roll the hedge forward. The decision to roll your hedge forward will be guided by the carry in the market and your basis expectations for later in the crop year. In the example used here, there was an attractive carry in the corn market at harvest (19 cent from December to July), and a weak harvest basis. Your decision may be different if the carry is small and the basis is strong - in this case you may find it better to just deliver the grain at harvest. Track a moving average on the internet? POSTED: March 1, 2006 Gary asks: I recently attended your "Winning the Game 2: Launch your Pre-Harvest Marketing Plan" program and I thought it was excellent. I was particularly interested in your use of a moving average as a trump card - a way to follow the trend higher before making a firm pricing commitment. Can you offer an easy way for me to track a moving average on the internet? Ed replies: I will explain in a step-by-step manner how to create moving averages on Barchart.com. I will use December '06 corn futures for my example. Step 1: Go to http://wwwbarchart.com Clearly you have much to explore on this site. The moving average is just one of 40 different technical tools available for you to use on the BarChart site. You can also change the size and quality of the chart you draw. Go back to the "Technicals" sections and you can lose the day in analyzing the market. It may just serve to confuse you further, if you don't have a marketing plan in place. Narrowing the basis in a forward contract POSTED: February 17, 2006 James asks: I got a copy of your presentation notes for "Grain Marketing 101: A Primer on Pricing Your Grain". Today I checked the local elevator and fall contract prices. I was quoted $5.50 for beans and $2.17 for corn for fall delivery. Those are basis levels of 69 and 40 cents under, respectively. How can I narrow the basis in a forward contract? What is a hedge to arrive contract? Ed replies: You have no way of narrowing the basis in your favor. It is set in a competitive way according to the needs of your elevator. Your only choice is to check other nearby elevators for a better bid, hope your elevator raises their bid, or explore the use of an HTA contract. With an HTA (hedge-to-arrive) contract (aka futures fixed contract, aka "basis not established" or BNE contract) you lock in a futures price while deferring the lock on your basis to some later date. The original intent of the HTA contract was to serve as a hybrid contract that featured some of the better aspects of a simple forward contract and selling futures directly. Like a forward contract, an HTA contract often allows you to contract an odd bushel amount (e.g. 3,700 bushels and not 5,000 bushels) and they usually carry no fees. Like selling futures directly, the HTA gives you control over the timing of your basis decision. Most, but not all, Minnesota elevators offer their customers HTA contracts. The fact that you are not familiar with the tool makes me wonder of your elevator is one of those that doesn't. By the way, at the basis levels you are being offered on soybeans, I greatly prefer the use of HTA contracts to price new crop grain. I can't predict basis levels at harvest but I expect something better (possibly 20 cents better) than the 69 under for soybeans. A bid of 40 under for corn looks very reasonable at this time. POSTED: February 15, 2006 Mark asks: Do you suggest having a new crop marketing plan on corn
committed to ethanol and/or livestock? Should an investor buy an out-of-the-money call for all the corn committed to ethanol for the entire year at that $2.50-3.00 level or at a projected level based on ethanol economics? Farmers and non-farmers are getting in over their heads with ethanol shares and there is a very big risk for them if we have a crop shortage. Due to stock splits and options to buy additional shares for cheap (to finance expansion) many farmers have suddenly found themselves with a big cash cow as long as the cow has corn to eat, but many of them now have more cows than corn. They now need to buy corn on the market since their acreage can no longer fill the need. One 100 million gallon ethanol plant devours anywhere from 38-40 million bu of corn. Two Martin County commissioners went on the record as saying their county couldn't support two proposed ethanol plants; one in Fairmont and another in Welcome. I can see why! Martin County produces only 37 million bushels of corn and it's the #1 pork producing county! One plant would take all the corn. Talk about local basis taking on a new dimension. Ed replies: I tell producers
with ethanol shares to keep those bushels out of their marketing
plans. I consider the ethanol plant their "hedge" against
lower prices. In simple terms when prices are low, the poor corn
price should be offset by larger profits and distributions from the
ethanol plant. When prices are high, dollars from uncommitted bushels
should help offset lower processing profits. I share your concerns about overexpansion in ethanol. |
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