60 Farm-Level Grain Marketing MAKING LOGICAL MARKETING DECISIONS: Substituting Costs, Probabilities, & Price Goals For Emotion

61 Why Marketing is Critical W Typical Corn Net Profit Margin, Past Years: $.30/bu. W $.10 increase in Price = 33% increase in Net Returns W Also Works in Reverse

62 Govt. Payments: Corn Loan Deficiency Pmts: Market Sensitive LDP is Positive if Posted County Price is Below Loan Rate: LDP = LR-PCP Counter Cyclical Pmts: Market Sensitive CCP Paid if higher of $2.35-LR or $2.35- U.S. Mktg. Year Avg. Price is positive Direct Payment: Not Market Sensitive SB = $5.36

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69 May 2005 Soybeans Objectives: $6.37, $6.58, $7.10? Year ago prices Offer contracts

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71 Dec. 06 Corn

72 C. Illinois Crushing Margins 12/29/05 12/30/04 $0.90/bu. $0.79/bu. 12/22/05: $0.91/bu. Soybeans

73 Export Sales 3/16/06 Corn Million Metric tons Soybeans Million metric tons (are these strong or weak?) 3/23/06 Corn: 0.91 SB: 0.23 Conversions: one metric ton = 39.4 Bu. Corn = 36.8 Bu. soybeans

74 From Overview of Grain Marketing Major Marketing Functions Providing time utility Providing form utility Providing space utility Financing Price & value discovery

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76 Key Points Starting point in amktgplan: financial needs of the business Know your break-even price Know your risk-bearing ability Plan marketing with a goal of at least covering cash-flow needs Look for mktg. & insurance tools to minimize risk of losing the business

77 PROFITS ARE A RETURN TO RISK OF LOSS Land earns rents Labor earns wages Capital earns interest Management earns salary “If you produce & market the same thing many other people produce, and in the same way, your profits will not be sustainable” Paraphrased from Dr.John Ikert, U. of MO.

78 MARKET MANAGEMENT 1. A plan consistent with your profits, risk and growth objectives (Your long-term goals for the farm business?) 2. Elements of a marketing plan A. Your cost of production B. Price goals C. Price projections based on solid information D. Processing of information E. How & when to pull the trigger: An execution process F. Records for future: how & why G. Evaluation: accomplishments, future changes

79 Cash-Flow Costs/AOwners Renter Crop-share Buyers Seed, fertilizer,pesticide. $181 $181 $90.50 $181 Insurance, interest, misc Fuel and repairs Drying Custom hire and labor hire Rent and real estate taxes Fixed debt payments Family living, income tax Cash flow costs/bu., 180 bu./A. $1.95 $2.79 $2.50 $2.89 Total cash flow needs $351 $502 $225 $520 Table 1. Corn Cash-flow Costs Per Acre, Selected Types of Farms in Iowa, /3-2/3 50/50 Corn March 05

80 Cash Flow Risk Ratio for Corn 50/50 Crop 1/3-2/3 Owners Renter Share Buyer Cash flow cost per acre$ 351 $502 $225 $520 Govt. payments?-$100 -$50 -$100 Cash needed from sales$251 $402 $175 $420 Expected or actual yield (bu.) Cash flow breakeven price$1.39 $2.23 $1.94 $2.33 Hedged market price ($/bu)$2.08 $ 2.08 Cash flow risk ratio67% 107% 93% 112% Cash flow R. R., $2.30 price? 60% 97% 84% 101% $2. 08 price, Owners need to sell 67% of crop to cover cash-flow needs. Partly from Dr. William Edwards, ISU Economics Department March 05

81 Cash-Flow Risk Ratio: Percent of the crop required to be sold to cover cash-flow costs Formula for computation: Cash-flow break-even price divided by selling price

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83 Table 5. Example Net Worth Risk Ratios For Corn in Central Iowa March 05 Owners Renters Crop-shareBuyers 000 $ assets $1,931.5 $317.3 $210.2 $1, $ liabilities $0 $157.3 $54.6 $ Net worth $1,931.5 $ $155.6 $444.3 Net worth risked (10%) 193,150 16,000 15,560 44,430 Crop acres Net worth risk ratio $322 $27 $26 $74 Max.Loss/bu.,norm. yld Interpretation: A loss of $0.16/bu. (from cash-flow break-even price would reduce renter’s net worth by 10%. 165 bu./A

84 Net-Worth Risk Ratio The maximum dollars per acre which can be lost in any one year before a predetermined percentage of the equity is lost.

85 Net-Worth Risk Ratio Max. dollars of net worth to be placed at risk divided by number of acres = Max.$ that can be risked per acre To compute max. loss per bu. before equity threshold is reached: divide $/A. by normal yld. = $/bu. that can be risked for pre-determined loss of equity

86 Net Worth Risk Ratio, Continued March 06 Owners Renters Crop-share Buyers -$0.56 $2.07 $1.62 $1.88 Cash flow Break even Price $1.39 $2.23 $1.94 $2.33 Price decline below B/E for 10% equity loss $1.95 $0.16 $0.32 $ % Corn price where 10% of net worth is lost: Fall bid, 3/21/06: $2.07 $2.07 $2.07 $2.07 (N. Central Iowa) (after Govt. Pmts.) What can lower the price where 10% of net worth is lost?

87 Owners Renter Crop-share Buyers Seed, fertilizer,pesticide. $84 $84 $42 $88 Insurance, interest, misc Fuel and repairs Drying Custom hire and labor hire Rent, real estate taxes Fixed debt payments Family living, income tax Total cash flow needs $184 $328 $117 $345 1/3-2/3 50/50 Table 4. Soybean Cash-Flow Costs Per Acre, Selected Types of Farms March 05

88 Cash Flow Break-even & Risk Ratio for Soybeans 50/50 Crop 1/3-2/3 Owners Renter Share Buyer Cash flow cost per acre $184 $328 $117 $345 Govt. payments?-$32 -$16 -$32 Cash needed from sales$152 $296 $101 $313 Expected or actual yield (bu.)/ A Cash flow breakeven price$3.17 $6.17 $4.21 $6.52 Hedged market price ($/bu)$5.86 Cash flow risk ratio54% 105% 72% 111% $5.86 price, Owners need to sell 54% of crop to cover cash-flow needs. Partly from Dr. William Edwards, ISU Economics Department March 05 Offer contract 1/03/06 could have triggered sales for renter near c-f break-even

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90 Key Points Starting point in a mktg plan: financial needs of the business Know your break-even price Know your risk-bearing ability Plan marketing with a goal of at least covering cash-flow needs Look for mktg. & insurance tools to minimize risk of losing the business Start Early

91 Basis: Key to Understanding Regional Variations in Price Three Components of Price: Level = Futures Basis Spreads over Time Basis: Cash Price Minus aSpecificFutures Contract price Example: N.C. Iowa Cash $1.81 May $2.24 (3/21/06) Basis?

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93 Theoretical Seasonal pattern for C. Iowa July basis Transportation cost to Chicago Storage costs to July delivery $ Under July futures Oct. Dec. Feb. April June July

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97 Corn Futures Price Differentials over Time 3/21/06 May $2.33 July 2.43 Sept Dec March 2.67 May 2.69 July 2.70 Dec Dec

98 Closing futures 3/22/04 Corn May3.19 July3.24 Sept.3.19 Dec.3.17 July Dec Beans May$10.56 July10.51 Aug Sept.8.92 Nov.7.87 Mar Nov Inverted Market

99 Using Basis to localize futures price for hedging December futures $2.53/bu. Less expected harvest basis 0.55 Less transaction cost 0.01 Expected hedge price $1.97

100 Example West Cent. Coop. corn contract, harvest delivery on 3/21/06 $2.03/bu. Is that comparable to what you would expect from a December futures hedge? (Dec. $2.53/bu.) (Last fall? Avg. ?)

101 Hedge Principle Equal & Opposite Positions in 2 Mkts. Loss in one offset by gain in the other Hold corn/soybeans, sell futures Equal: don’t sell more futures than you have in cash position

102 Next Week 3/30 Read Text book Chapter 3 if you haven’t. Read Chapter 6. Read Chapter 7. Look at Chapter 4. Review class notes on web page Prepare for short quiz Continue with the ½ grain marketing exercise.