Minding Ag's Business
Marcia Zarley Taylor DTN Executive Editor

Wednesday 09/19/12

Corn Marketing Haves and Have Nots

Farmers who have mastered volatile commodity markets have been bringing home the bacon since 2007, a new study shows. In three of the past five years, the range between the best and worst cash grain marketers was worth $4/bu. or more for each farm's entire corn crop, a study by the financial consulting firm AgriSolutions in Brighton, Ill. found. The firm analyzed results of more than 300 cash grain operations in more than a dozen states and over 300,000 acres.

Gaps between good and great farm marketers widened during high volatility years. Some operators chalked up $4/bu. advantages on corn compared to the bottom of the pack, AgriSolutions found.

USDA's season average cash prices, which are based on Illinois grain bids and weighted heavily to harvest sales, actually mask the huge extremes between real operators, AgriSolutions found. Starting in 2007 to 2011, the season-average corn price ran $4.20, $4.06, $3.55, $5.18 and $6.20 respectively, according to the USDA index.

However, in highly volatile marketing years like 2008, 2010 and 2011 the spread between the best and worst farms widened dramatically. Volatility rewarded a handful of top cash marketers with big $7/bu. average returns on their entire crops, AgriSolutions found. Not surprisingly, in years like 2009 when corn markets tanked and many operators lost money, returns for most operators in the study stayed in a much narrower band. None of these cash returns included profits or losses from hedging accounts.

Comparing yourself to "average" can be quite misleading, AgriSolutions Sam Bachman said. "There's a whole lot more variation out there than we thought. Capturing an extra $4/bu. with better marketing than your peers is no slam dunk, but it can really give a top operator an edge."


AgriSolutions doesn't speculate why some operators underperform the pack, but market advisers offer theories. Weather disasters and overly aggressive pre-harvest marketing can be a costly combination because they force growers to buy back their positions. This summer, corn prices moved by dollars per bu. in days, too fast for some operators to react.

Years like 2012 expose the hazards of relying on cash-only contracts for too much pre-harvest selling, said Jamie Wasemiller, an analyst with the Chicago-based Gulke Group.

Crop revenue insurance is supposed to give operators the courage to forward sell, but doing that with just cash contracts can expose operators to severe penalties should yields fall short of contract commitments, Wasemiller said. He thinks growers who sold up to their maximum insurance guarantee last spring will be rethinking that strategy come 2013. He recommends that growers use a combination of tools, including cash contracts, options and futures when pre-harvest marketing.

What happens when farmers over commit? Wisconsin growers who can't fill their physical contracts due to the drought are paying as much as $3/bu. to exit positions now, including the difference between the price of the original contract and today's market price, plus service fees. In Ohio, Wasemiller has clients whose grain buyers require delivery of the physical commodity, so growers must pay to ship the equivalent of their bushel shortfall to their contract location.

So much variability among producers is already causing some ag lenders to change policies, Wasemiller added. Near Rockford, Ill., some banks say they won't advance 2013 operating loans unless farmers have subscribed to a professional marketing advisory service. They hope that will prevent more crash landings in the future.


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Posted at 11:54AM CDT 09/19/12 by Marcia Zarley Taylor
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