How to write a Post harvest marketing plan...2018/02/18 · How to Write a Post-Harvest Marketing Plan Edward Usset, Grain Marketing Economist University of Minnesota Columnist, Corn

How to Write a Post-Harvest Marketing Plan

Edward Usset, Grain Marketing Economist

University of Minnesota

Columnist, Corn & Soybean Digest

[email protected]

www.cffm.umn.edu

Copyright © 2017 Center for Farm Financial Management, University of Minnesota. All Rights Reserved.

Post-harvest marketing is different!

Pre-harvest marketing is strategic

• A plan is forward looking and may be written up to two years prior to harvest

• Production costs establish minimum price objectives

• Seasonal patterns point to AMJ as a good time for action

Post-harvest marketing is tactical

• A plan is written at harvest, based on basis and carrying charges

• Production costs are not considered in the plan

• Seasonal patterns point to AMJ as a good time for action


How to write a post-harvest marketing plan

1. Post-harvest marketing choices

2. What would Earl do?

3. Write a post-harvest marketing plan







Objective: Seek strategies that balance risk and reward in the current market environment. Hold no un-priced grain beyond July 1.

Harvest: Price and deliver ___________ bushels (no storage), and ___________ more bushels (good price)

Re-own __________ bushels with an options strategy tbd

Store ___________ bushels of unpriced grain for later saleSell _______ bushels when the cash price reaches $_______ or by ________ Sell _______ bushels when the cash price reaches $_______ or by ________Sell _______ bushels when the cash price reaches $_______ or by ________Bushels not priced by __________ will be sold _____________________Sell if the price falls below $___________________

Store and sell the carry on ___________ bushels with a pricing tool tbd Lock the basis on ________ bushels at ____ cents under the ______ contract, or by ____________ at the current basis

Post-Harvest Corn Marketing Plan


Post-harvest marketing choices…

Sell grain at harvest

Hold grain in storage to sell later

Hold grain in storage and “sell the carry”

How do I make a choice?







Earl Eitheror

Earl has on-farm storage. At harvest he makes an “either/or” choice. When carrying charges are large, he chooses to store grain and “sell the carry.” When carrying charges are small, he chooses to store his grain unpriced, for sale in the spring.


Decision Tree for Sizing Up the Market


Earl Eitheror

Earl has on-farm storage. At harvest he makes an “either/or” choice. When carrying charges are large, he chooses to store grain and “sell the carry.”When carrying charges are small, he chooses to store his grain unpriced, for sale in the spring.


Carrying Charges

Large crops/large free stocks = large carrying charges

•In the bear market environment, Earl plays it safe by selling the carry.

•Carrying charges will not get larger than the commercial cost of storing grain


How Does Earl “Sell the Carry”?

In the bear market environment, Earl plays it safe by selling the carry.

He has three tools to “sell the carry.”

• Forward contract (when the basis is good)

• Hedge-to-arrive (when basis is poor)

• Sell futures (when basis is poor and you want maximum flexibility)


Dec. $3.53

Mar. $3.67

May $3.75

Jul. $3.83

CBOT corn futures: October 13, 2017

Carrying Charges

Large carrying charges are an incentive to

store today and sell tomorrow; hedging

risk and capturing a return to storage.

Three tools to sell the carry

• Forward contract

• Hedge-to-arrive

• Sell futures


Dec. $3.53

Mar. $3.67

May $3.75

Jul. $3.83

CBOT corn futures and Pipestone, MN cash market: October 13, 2017

Carrying Charges

$2.86 1.At harvest, place the crop in storage, current basis is 67 cents under the Dec, or 97 cents under the July contract


Dec. $3.53

Mar. $3.67

May $3.75

Jul. $3.83


Carrying Charges


2. Sell the carry, selling July futures (or HTA)


Dec. $3.53

Mar. $3.67

May $3.75

Jul. $3.83


Carrying Charges



3. What’s your expected basis in May or June?

40 under?


Dec. $3.53

Mar. $3.67

May $3.75

Jul. $3.83


Carrying Charges



3. What’s your expected basis in May or June?

4. Your final price depends on the actual basis; 40 under will result in a final price of $3.43

$3.43


Earl Eitheror

Earl has on-farm storage. At harvest he makes an “either/or” choice. When carrying charges are large, he chooses to store grain and “sell the carry.” When carrying charges are small, he chooses to store his grain unpriced, for sale in the spring.


Nov. $15.60

Mar. $15.30

May $14.89

Jul. $14.69

CBOT Soybean Futures, October 1, 2012

Aug. $14.43

Inverse Carrying Charges: An inverted market represents the opposite of a carrying charge market – deferred contracts trade at a discount to nearby contracts.

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

Carrying Charges


Nov. $15.60

Mar. $15.30

May $14.89

Jul. $14.69

CBOT Soybean Futures, October 1, 2012

Aug. $14.43

Store grain today and…

…sell tomorrow?

Carrying Charges


Carrying Charges

Small crops/tight stocks = small carrying charges or inverses

•In the bull market environment, Earl takes a chance with unpriced grain.

•There is no limit to the size of an inverse (see corn in 1996, soybeans in 2004, wheat in 2008)


based on Iowa corn prices received by farmers

In the bull market environment, Earl takes a chance with unpriced grain.


Earl Eitheror

Earl bases his choice on carrying charges.

Does it work?

Let’s compare Earl to Barney Binless


Barney Binless

Barney has no on-farm storage, so he sells his crop off the combine, taking the harvest price every year.


Earl BarneyEarl’s

advantage> / = to Barney

Corn 2.92 2.78 0.14 22/27 years

Soybeans 7.56 6.95 0.61 18/27 years

HRS Wheat 4.69 4.54 0.15 21/27 years

Earl vs. Barney, 1990-2016

• Barney Binless represents the harvest price.• Due to storage limitations, Earl sells 20% of his grain at harvest, and this

sale is part of his average price.• Earl’s results are net of on-farm storage costs.


Earl vs. Barney, 1990-2016

• Over time, Earl’s choice paid-off vs. the harvest price, net of on-farm storage costs

• His results are consistent for corn, soybeans and wheat

• Earl’s choice does not work every time (nothing is 100%)







Is basis high or low?

Are market prices high or low?

What are my storage costs?

What is my appetite for risk?

1. Use the decision tree and plan template

2. Ask; What is the carry in the market? (i.e. What would Earl do?)

3. Refine your plan…

Writing a post-harvest marketing plan

4. Don’t forget your exit plan!




Objective: Seek strategies that balance risk and reward in the current market environment. Hold no un-priced grain beyond July 1.

Harvest: Price and deliver ___________ bushels (no storage), and ___________ more bushels (good price)

Re-own __________ bushels with an options strategy tbd

Store ___________ bushels of unpriced grain for later saleSell _______ bushels when the cash price reaches $_______ or by ________ Sell _______ bushels when the cash price reaches $_______ or by ________Sell _______ bushels when the cash price reaches $_______ or by ________Bushels not priced by __________ will be sold _____________________Sell if the price falls below $___________________

Store and sell the carry on ___________ bushels with a pricing tool tbd Lock the basis on ________ bushels at ____ cents under the ______ contract, or by ____________ at the current basis

Post-Harvest Corn Marketing Plan


Sizing Up the Market

The situation at harvest (2017)…


2017 Post-Harvest Marketing Plans

Southwest MN

Mid-October

Dec‘17 futures $3.53

basis 67 under

harvest price $2.86

Jul‘18 futures $3.83

Corn




Sizing up the 2017 corn market

Earl has a carry to sell

Basis is poor and should be modestly better by spring

Diversify with some unpriced corn in storage


Objective: Get a good average price! Hold no unpriced corn beyond July 1, 2018.

20,000 bushels: Most priced earlier with Dec’17 sales -sell at harvest.

30,000 bushels: Place corn in storage and wait for higher prices. Exit plan: Sell 10,000 bushels @ $3.40, 10K @ $3.50 and 10K @ $3.60. Sell if the cash price falls below $2.65. Bushels unsold at the end of April will be sold in equal increments in May and June.

30,000 bushels: Place corn in storage and sell the carry with July futures. Exit plan: Unwind the hedge when the basis reaches 40 under the July, or by June 20.

Corn: 2017 Post-Harvest Marketing Plan


2017 Post-Harvest Marketing Plans

Southwest MN

Mid-October

Nov‘17 futures $10.02

basis 94 under

harvest price $9.08

Jul‘18 futures $10.36

Soybeans




The soybean market has a small carry

Basis is poor but should improve some – sell a small carry?

Hope for the best with unpriced soybeans in storage

Sizing up the 2017 soybean market


Does it ever make sense to sell a small carry?

The benefit of selling a small carry…

• hedge against lower prices

• allow for basis improvement

• defer taxes to a new year

More ways to find the dime!


Soybeans: 2017 Post-Harvest Marketing Plan

Objective: Get a good average price! Hold no unpriced soybeans beyond July 1, 2018.

5,000 bushels: Price earlier with sales of Nov’17 futures: deliver at harvest.

15,000 bushels (half priced earlier with Nov’17 sales): Place in storage and roll the hedge forward to July. Exit plan: Unwind the hedge when the basis reaches 60 under the July, or by June 20.

5,000 bushels: Place in storage and hold for higher prices. Exit plan: Sell 2,500 bushels @ $9.20 and 2,500 bushels @ $9.50. Sell if the cash price falls below $7.80. Bushels unsold at the end of April will be sold in equal increments in May and June.


Peter Paperfarmer says…

“If I sell cash grain, or sell the carry at harvest and not re-own with call options, I’ve lost my upside potential!”

My response? Look ahead with a 2018 pre-harvest marketing plan (and your upside potential didn’t cost a penny).


Pre and post harvest marketing work together!

or

How to get $4 corn


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 contractPrice 10,000 bushels at $4.05c/4.55f, or by March 29, pricing tool tbdPrice 10,000 bushels at $4.35c/4.85f, or by April 30, pricing tool tbdPrice 15,000 bushels at $4.65c/5.15f, or by May 29, pricing tool tbdPrice 10,000 bushels at $4.95c/5.45f, or by June 13, pricing tool tbd Price 10,000 bushels at $5.25c/5.75f, or by June 27, pricing tool tbd

Plan starts on January 1, 2018. 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 2018.

Corn 2018 Pre-Harvest Marketing Plan

Dec’18 @ $3.84


How to get $4 corn*

$4.10 sale of Dec’18 corn futures

-0.50 harvest basis

$3.60 harvest price

+0.25 positive carry from Dec to July

+0.15 basis improvement (-35N vs -50Z)

$4.00 corn!

*assumes a normal harvest basis of 50 cents under December futures, and a spring basis of 35 cents under the July futures.


How to get $4 corn*


-0.50 harvest basis

$3.60 harvest price

1. sell



year Dec high date

2017 4.15 July 10

2016 4.48 June 17

2015 4.37 July 2

2014 5.13 April 8

2013 5.94 February 4

How to get $4 corn*


How to get $4 corn*


-0.50 harvest basis

$3.60 harvest price


1. sell

2. roll


Dec. $3.53

Mar. $3.67

May $3.75

Jul. $3.83

CBOT corn futures: October 13, 2017

Rolling the hedge?

buy back Dec futures and…

…sell July futures


year Dec/Jul carry (cents/bu)

2017 27

2016 29

2015 23

2014 22

2013 30

How to get $4 corn*


How to get $4 corn*


-0.50 harvest basis

$3.60 harvest price


+0.15 basis improvement (-35N vs -50Z)

$4.00 corn!

1. sell

2. roll

3. b


year basis date

2018 ?? ??

2017 -50 May 17

2016 -47 Jun 16

2015 -32 Jun 15

2014 -50 May 15

How to get $4 corn*



-0.50 harvest basis

$3.60 harvest price

+0.25 positive carry, Dec’18/Jul’19

+0.15 basis improvement (-35N)

$4.00 corn!


1. sell

2. roll

3. b

4. sell

How to get $4 corn*


cropCash price opportunity harvest

price*

2017 $4.00 $2.80-2.90

2016 $4.00+ $2.80-2.95

2015 $4.00+ $3.25-3.30

2014 $4.50+ $2.90-3.25

2013 $5.00+ $3.95-4.05* SW MN

Review the opportunity…

How to get $4 corn*


Review the risks…

1.No sale of Dec’18 futures at $4.10+ (currently trading at $3.90)

2.The Dec/July carry less than 25 cents

3.Basis risk

How to get $4 corn*



Earl shows us that an approach that

works over time is not a guarantee

that it will work every time.

Marketing is not easy!


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

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


Quiz Time!

My students speak!


Quiz Time!

“Professor Usset is a fantastic

teacher. He really cares about his students and is passionate about the subject.”


Quiz Time!

“Edward is a great teacher! If he

could make the final exam easier, the class would be perfect.”


Quiz Time!

“You are one of the best teachers I ever met in my college life.

Come and party with me.”


Quiz Time!

“The instructor was rather

scatter-brained and confused about the content.”


Post harvest choices are few Sell grain at harvest

Hold grain in storage to sell later

Hold grain in storage and “sell the carry”

What would Earl do? Carrying charges are critical to the storage decision

Refine your plan… Are basis or prices high or low? What is my appetite for risk?

Get an exit plan!

Review


How to Write a Post-Harvest Marketing Plan

Thank you!

Documents

How to write a Post harvest marketing plan...2018/02/18 · How to Write a Post-Harvest Marketing Plan Edward Usset, Grain Marketing Economist University of Minnesota Columnist, Corn