Developing Your Personal Grain Marketing Plan JCH: April 2006 The Ed Usset Model Center for Farm Financial Management University of Minnesota I have always been impressed with the conservative approach to marketing presented by Ed Usset, Grain Marketing Specialist, the Center for Farm Financial Managaement, University of Minnesota-St. Paul. This short slide presentation is intended to assist you, the grain producer, in developing your own personal PreHarvest marketing plan for the 2006 production year for corn and soybeans in our area.

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 Examples of a reactive strategy include (1) selling grain to pay bills and (2) selling grain at harvest because I have no other alternatives. Overactive strategies include “re-owning” and “reselling” grain using futures and options. A proactive strategy aims to price my grain just once.

Marketing is Important! The average farm earns 20-30 cents per bushel (including gov’t payments). Just 10 cents more per bushel could increase net income by 33-50%! Great marketing is not finding the high price. It’s finding an extra 10-20 cents per bushel with a solid plan that avoids mistakes. Point: I am not seeking an extra dime by outsmarting the market and picking the highs and lows. I find the dime (or quarter!) in eliminating mistakes. One of those mistakes is the reluctance towards pre-harvest marketing.

Why do I need a Marketing Plan? Fear and greed are powerful emotions - they will affect your decisions. A solid plan is the only effective weapon against these emotions “Plan your trades, trade your plan”

Tillman Farm Pre-Harvest Corn Marketing Plan Objective: Buy crop insurance to protect my production risk, and have 75% of my anticipated corn crop (based on APH yield) priced by late May. Price 10,000 bushels at $2.10 cash price ($2.50 Dec. futures) using forward contract/futures hedge/futures fixed contract. Price 10,000 bushels at $2.22c/2.62f, or by Mar 29, using a fixed-price contract. Price 15,000 bushels at $2.34c/2.74f, or by Apr 7, using a fixed-price contract. Price 10,000 bushels at $2.46c/2.86f, or by Apr 27, consider options/trend system. Price 10,000 bushels at $2.58c/2.98f, or by May 16, consider options/trend system. Price 10,000 bushels at $2.70c/3.10f, or by May 27, consider options/trend system. Plan starts on November 1, 2005. Earlier sales will be made at a 15 cent premium to price targets noted above. Ignore decision dates and make no sale if prices are lower than $2.10 local cash price/$2.50 December futures. Exit all options positions by mid-September.

Crop Insurance Crop insurance is like health insurance for your crops. The better the policy coverage, the lower the deductible, the higher the premium. Unlike health insurance, the government pays a portion of your crop insurance premium.

The Facts of Revenue-Based Crop Insurance Covered Tax Problem! High Yield Low Yield Low Price High Price

Tillman Farm Pre-Harvest Corn Marketing Plan (2) Decision dates Objective: Buy crop insurance to protect my production risk, and have 75% of my anticipated corn crop (based on APH yield) priced by late May. Price 10,000 bushels at $2.10 cash price ($2.50 Dec. futures) using forward contract/futures hedge/futures fixed contract. Price 10,000 bushels at $2.22c/2.62f, or by Mar 29, using a fixed-price contract. Price 15,000 bushels at $2.34c/2.74f, or by Apr 7, using a fixed-price contract. Price 10,000 bushels at $2.46c/2.86f, or by Apr 27, consider options/trend system. Price 10,000 bushels at $2.58c/2.98f, or by May 16, consider options/trend system. Price 10,000 bushels at $2.70c/3.10f, or by May 27, consider options/trend system. Plan starts on November 1, 2005. Earlier sales will be made at a 15 cent premium to price targets noted above. Ignore decision dates and make no sale if prices are lower than $2.10 local cash price/$2.50 December futures. Exit all options positions by mid-September. (1) Pricing targets (3) Pricing tools & trump cards

Tillman Farm Pre-Harvest Corn Marketing Plan Objective: Buy crop insurance to protect my production risk, and have 75% of my anticipated corn crop (based on APH yield) priced by late May. Price 10,000 bushels at $2.10 cash price ($2.50 Dec. futures) using forward contract/futures hedge/futures fixed contract. Price 10,000 bushels at $2.22c/2.62f, or by Mar 29, using a fixed-price contract. Price 15,000 bushels at $2.34c/2.74f, or by Apr 7, using a fixed-price contract. Price 10,000 bushels at $2.46c/2.86f, or by Apr 27, consider options/trend system. Price 10,000 bushels at $2.58c/2.98f, or by May 16, consider options/trend system. Price 10,000 bushels at $2.70c/3.10f, or by May 27, consider options/trend system. Plan starts on November 1, 2005. Earlier sales will be made at a 15 cent premium to price targets noted above. Ignore decision dates and make no sale if prices are lower than $2.10 local cash price/$2.50 December futures. Exit all options positions by mid-September. (1) Pricing targets

Pricing Targets Choose your minimum price threshold Loan rate Cost of production (pre-harvest only) See appendix for detailed costs of production in Minnesota This is the format for the printed slide, but we could customize the display slide for each meeting to show the cost of production for the particular region. $2.00 per bushel is about 15 cents over loan, and approaches average production costs for Minnesota corn growers.

Tillman Farm Pre-Harvest Corn Marketing Plan (2) Decision dates Objective: Buy crop insurance to protect my production risk, and have 75% of my anticipated corn crop (based on APH yield) priced by late May. Price 10,000 bushels at $2.10 cash price ($2.50 Dec. futures) using forward contract/futures hedge/futures fixed contract. Price 10,000 bushels at $2.22c/2.62f, or by Mar 29, using a fixed-price contract. Price 15,000 bushels at $2.34c/2.74f, or by Apr 7, using a fixed-price contract. Price 10,000 bushels at $2.46c/2.86f, or by Apr 27, consider options/trend system. Price 10,000 bushels at $2.58c/2.98f, or by May 16, consider options/trend system. Price 10,000 bushels at $2.70c/3.10f, or by May 27, consider options/trend system. Plan starts on November 1, 2005. Earlier sales will be made at a 15 cent premium to price targets noted above. Ignore decision dates and make no sale if prices are lower than $2.10 local cash price/$2.50 December futures. Exit all options positions by mid-September.

Decision Dates How do they work? If I reach a decision date before my pricing target is met, I will price the grain (if prices are above my minimum pricing threshold). Decision dates are needed to make it a real plan for action Crop insurance and/or options allow us to forward price with confidence What’s so special about the March to May period in pre-harvest pricing?

Tillman Farm Pre-Harvest Corn Marketing Plan Objective: Buy crop insurance to protect my production risk, and have 75% of my anticipated corn crop (based on APH yield) priced by late May. Price 10,000 bushels at $2.10 cash price ($2.50 Dec. futures) using forward contract/futures hedge/futures fixed contract. Price 10,000 bushels at $2.22c/2.62f, or by Mar 29, using a fixed-price contract. Price 15,000 bushels at $2.34c/2.74f, or by Apr 7, using a fixed-price contract. Price 10,000 bushels at $2.46c/2.86f, or by Apr 27, consider options/trend system. Price 10,000 bushels at $2.58c/2.98f, or by May 16, consider options/trend system. Price 10,000 bushels at $2.70c/3.10f, or by May 27, consider options/trend system. Plan starts on November 1, 2005. Earlier sales will be made at a 15 cent premium to price targets noted above. Ignore decision dates and make no sale if prices are lower than $2.10 local cash price/$2.50 December futures. Exit all options positions by mid-September. Why March-April-May?

CBOT December Corn Futures, 1980-2005 Contract 1-May 1-Oct Change 1980 2.95 3.49 0.54 1981 3.77 2.87 (0.90) 1982 2.93 2.20 (0.73) 1983 3.03 3.53 0.50 1984 3.04 2.78 (0.26) 1985 2.64 2.26 (0.39) 1986 2.04 1.77 (0.27) 1987 1.87 1.84 (0.03) 1988 2.27 0.68 1989 2.39 1990 2.70 2.29 (0.42) 1991 2.53 2.54 0.01 1992 2.12 (0.41) 1993 2.43 0.00 1994 2.58 2.14 (0.44) 1995 2.63 3.11 0.48 1996 3.33 2.90 1997 2.76 2.56 (0.20) 1998 2.62 2.05 (0.58) 1999 2.31 2000 1.99 (0.63) 2001 2.11 (0.16) 2002 0.36 2003 2.33 (0.13) 2004 3.17 2.06 (1.11) 2005 (0.21) Average CBOT December Corn Futures, 1980-2005 19 years (73%) the market declined 7 years (27%) the market improved 14 years the market declined more than 25 cents! This table shows a “snapshot” of December corn futures at May 1 and October 1. If the market movement was random, it would be a coin flip as to whether the market moves up or down from May to October. It isn’t, market declines 7 years out of 10. Note that our minimum pricing threshold of $2.50 per bushel kept us from selling too early (and below loan) in the spring.

Decision Dates Don’t forget to sell something! Decision dates are placed in the spring to remind ourselves to get something done when the market is often stronger. But remember your minimum price….

CBOT November Soybean Futures, 1980-2005 Contract 1-May 1-Oct Change 1980 6.45 8.12 1.67 1981 8.27 6.46 (1.81) 1982 6.78 5.29 (1.50) 1983 8.58 1.80 1984 7.13 5.90 (1.24) 1985 6.06 5.14 (0.93) 1986 5.24 4.88 (0.36) 1987 5.34 5.45 0.11 1988 7.14 8.17 1.04 1989 7.24 5.77 (1.47) 1990 6.55 6.05 (0.51) 1991 6.09 5.89 (0.20) 1992 5.33 (0.72) 1993 5.96 6.18 0.22 1994 6.28 5.38 (0.90) 1995 6.37 0.32 1996 7.58 7.49 (0.08) 1997 6.96 6.21 (0.76) 1998 6.17 5.15 (1.02) 1999 4.81 (0.33) 2000 5.80 4.90 2001 4.34 4.52 0.18 2002 4.56 5.42 0.86 2003 5.53 6.87 1.34 2004 7.45 5.35 (2.10) 2005 6.22 5.73 (0.49) Average 6.27 5.98 (0.30) CBOT November Soybean Futures, 1980-2005 17 years (65%) the market declined 9 years (35%) the market improved 12 years the market declined more than 50 cents! Snapshot of November soybean futures, market declines around 7 years out of 10. Note that our minimum pricing threshold of $5.55 per bushel kept us from selling too early (and below loan) in the spring.

Pre-Harvest Pricing The 25 year seasonal price history is compelling, but consider two more reasons why pre-harvest sales are important Strong seasonal tendency LDP’s give me upside potential in a down market! The sale is made at a price that works for me! I don’t think we can over-emphasize the idea that the value of a pre-harvest marketing plan goes beyond the seasonal price tendencies. I like to say that even if the seasonal tendency did not exist (i.e. the odds of going lower into fall were 50-50), I still have a strong interest in pre-harvest sales.

Tillman Farm Pre-Harvest Corn Marketing Plan Objective: Buy crop insurance to protect my production risk, and have 75% of my anticipated corn crop (based on APH yield) priced by late May. Price 10,000 bushels at $2.10 cash price ($2.50 Dec. futures) using forward contract/futures hedge/futures fixed contract. Price 10,000 bushels at $2.22c/2.62f, or by Mar 29, using a fixed-price contract. Price 15,000 bushels at $2.34c/2.74f, or by Apr 7, using a fixed-price contract. Price 10,000 bushels at $2.46c/2.86f, or by Apr 27, consider options/trend system. Price 10,000 bushels at $2.58c/2.98f, or by May 16, consider options/trend system. Price 10,000 bushels at $2.70c/3.10f, or by May 27, consider options/trend system. Plan starts on November 1, 2005. Earlier sales will be made at a 15 cent premium to price targets noted above. Ignore decision dates and make no sale if prices are lower than $2.10 local cash price/$2.50 December futures. Exit all options positions by mid-September. (3) Pricing tools & trump cards

Pricing Tools I understand the opportunity in pre-harvest pricing, but which pricing tool should I use? Fixed-price tools Forward contract Sell futures Futures fixed (HTA) Minimum-price tools Forward contract and buy a call option Buy a put option Minimum price tool offered by local elevator (?) The purpose of the pricing tools section is to go over the mechanics of how each works and how to calculate a local price received.

Launch Your Marketing Plan What have we learned? A plan is discipline - plan your trades, then trade your plan A plan is proactive, not reactive, and not overactive Pre-harvest marketing is very important – history supports it, LDP’s may give you a higher price in a lower market, and does the price work for you?

Launch Your Marketing Plan What have we learned? Crop insurance is confidence Set pricing targets and decision dates, track your baseline price The use of options and technical trading tools (trump cards) offer flexibility with discipline. Use selectively!

The Challenge to you, you need to make your plan! Objective: Buy crop insurance to protect my production risk, and have ___% of my anticipated corn crop (based on APH yield) priced by late May. Price ______ bushels at $______ cash price ($_______ Dec. futures) using ___________. Price ______ bushels at $______c/______f, or by ____________, using _____________. Price ______ bushels at $______c/______f, or by ____________, using _____________. Plan starts on __________________. Earlier sales will be made at a _________ cent premium to price targets noted above. Ignore decision dates and make no sale if prices are lower than $_________ local cash price/$_________ December futures.

Tillman Farm Pre-Harvest Corn Marketing Plan (2) Decision dates Objective: Buy crop insurance to protect my production risk, and have 75% of my anticipated corn crop (based on APH yield) priced by late May. Price 10,000 bushels at $2.10 cash price ($2.50 Dec. futures) using forward contract/futures hedge/futures fixed contract. Price 10,000 bushels at $2.22c/2.62f, or by Mar 29, using a fixed-price contract. Price 15,000 bushels at $2.34c/2.74f, or by Apr 7, using a fixed-price contract. Price 10,000 bushels at $2.46c/2.86f, or by Apr 27, consider options/trend system. Price 10,000 bushels at $2.58c/2.98f, or by May 16, consider options/trend system. Price 10,000 bushels at $2.70c/3.10f, or by May 27, consider options/trend system. Plan starts on November 1, 2005. Earlier sales will be made at a 15 cent premium to price targets noted above. Ignore decision dates and make no sale if prices are lower than $2.10 local cash price/$2.50 December futures. Exit all options positions by mid-September. (1) Pricing targets (3) Pricing tools & trump cards

A continual reminder! Think marketing! Watch markets daily! Know your costs! Utilize your analysis! Establishing a price where we make a ‘profit’ is the key! Think profit gaps! What are your trigger prices? Lock in prices! Getting the top price will not be possible! Control your emotions! Don’t become over-whelmed with data overload! Use strategies that have worked over time and which have strong probabilities behind them!