1. Grain Marketing III MAKING LOGICAL MARKETING DECISIONS: Substituting
Probabilities
for Emotion

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

5. MARKET MANAGEMENT 2. The Plan A. Cost of production for firm
1. A plan to market consistent with firm’s
objectives on profits, risk and growth
2. The Plan
A. Cost of production for firm
B. Establishing price goals
C. Price projections based on solid information
D. Processing of information
E. An execution process
F. Records for future: how & why
G. Evaluation: accomplishments, future changes

6. MARKETING CHALLENGE Uncertainty: not enough history for probabilities
Risk vs. uncertainty
Uncertainty: not
enough history
for probabilities
Probabilities: based on history
Requires recognition &
actions

7. 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.

8. Custom hire and labor hire 9 9 4.50 9
Soybean Cash-Flow Costs Per Acre, Selected Types of Farms
1/3-2/3
50/50
Owners
Renter
Crop-share
Buyers
Seed, fertilizer,
pestic
$72
$72
$36
$72
Insurance, interest,
misc 14 7 16
Fuel and repairs 10
Drying 
Custom hire and labor hire
Rent and real estate taxes 90
Fixed debt payments 74
Family living, income tax 69
Total cash flow needs
$191
$307
$ $321
Adapted from M. Duffy & D. Smith, Estimated Costs of Crop Production in Iowa, FM-1712 Rev. , ISU Economics Department, Jan.20 02

11. Cash Flow Risk Ratio for Corn
Partly from Dr. William Edwards, ISU Economics Department
50/50
Crop
1/3-2/3
Owners
Renter
Share
Buyer
Cash flow cost per acre
$271
$397
$181
$416
Govt. payments?
-$90
-$90
-$45
-$90
Cash needed from sales
$181
$307
$136
$326
Expected or actual yield (bu.)
145
145
72.5
145
Cash cost breakeven price
$1.25
$2.12
$1.88
$2.25
Hedged market price ($/bu)
$2.15
$2.15
$2.15 $
2.15
Cash flow risk ratio
58% 99 % 87 %
105 %
Cash flow R. R., $1.85 price? 76% 115% 102% 122%
$1.85 price, Owners need to sell 76% of
crop to cover cash-flow needs.

14. Net Worth Risk Ratio, Continued
Owners
Renters
Crop-share
Buyers
Corn price where
10%
10%
-$0.62
$1.96
$1.56
$1.74
of net worth is lost:
(after Govt. Pmts.)
Cash flow Break
even Price $ $2.12
$ $2.25
Price decline below B/E for
10% equity loss
$ $ $ $0.51
Fall bid, 2/25/02:
$ $1.88
$1.88
$1.88
(N. Central Iowa)
Fall bid, 4/03/03:
$ $ $ $2.02
(N. Central Iowa)

15. 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

16. Types of conventional grain contracts
Forward contract: establishes price & basis
Delayed price: neither is established
Price later: same as above (credit sale)
Hedge-to-arrive (non-roll): establishes futures, but not basis
Delayed-payment: shifts income for tax purposes
Basis contract: establishes basis, not futures
Minimum-price: retains upward flexibility

17. Grain Contracts: Areas of Risk Exposure
Price Level
Basis
Spreads (Intra-and Inter-Year)
Options volatility risk
Production risk
Counter-party risk
Control risk
Tax risk

18. Key Elements in Grain Contracts
Quantity & quality
Delivery date
Delivery location
Pricing formula
Quality differentials
Adjustments if quality is not met
Date
Signature of both parties

19. Grain Marketing Alternatives
Timing considerations:
(1) Pre-harvest, for fall? or later delivery?
What is the market telling you?
How early to start pricing?
(2) Post-harvest: what to do about the LDP
Sell at harvest? Store? How long? What does it cost? What is the market telling you?

20. Grain Marketing Alternatives
What tool to use?

21. Challenge: Can 2003 soybeans be priced before harvest?•
Cash flow pressures are large for some
producers •
LDP adds large risk when pricing below
loan rate •
Forward contracting adds risk •
Hedging adds risk •
Are workable alternatives available for
price protection?

22. increased
t test, signif. at 8% level
Avg.

23. 82% of years, price declined, winter/spring to harvest, 18% prices rose
Past history does not guarantee future performance.

24. Avg. Dec. Corn Futures, Normal Crops 1975-1999
2.20
2.25
2.30
2.35
2.40
2.45
2.50
2.55
2.60
$/Bu.
Dec.4
Jan.2
Feb.1
Feb.4
Mar.3
Apr.2
May 1
May 4
June 3
July 2
Aug.1
Aug.4
Sept. 2
Oct.1
Oct4
Nov.2
Dec.1
Avg. Dec. Corn Futures, Normal Crops
Occurred 81% of time
1st. wk. July
3rd. wk. May
Hedge lifted

25. WEEKLY AVERAGE, DECEMBER CORN FUTURES
PRICE,SHORT CROP YEARS,
Occur 19% of Years
2.5
2.55
2.6
2.65
2.7
2.75
2.8
2.85
2.9
2.95
Dollars per Bushel
1st Week July
3rd Week October
3rd Week May
Dec 4 Jan 2 Feb 1 Feb 4 Mar 3 Apr 2 May 1 May 4 Jun 3 Jul 2 Aug 1 Aug 4 Sep 2 Oct 1 Oct 4 Nov 2 Dec 1
Weeks

26. Options & Grain Pricing•
Two Kinds: puts & calls •
For farmers: generally buy.
Sell is risky •
Buying put
for owned grain
sets floor
price •
Buying calls after sale
: lets you follow
mkt
. up--retains ownership •
Financial exposure: premium + broker. •
Tax treatment may be different on call
purchases:
could be speculative

27. Pricing 50% of yield with puts•
Declining price :
put value tends to
rise, adds value to half of crop •
Rising price:
Value of 100% of crop
increases; only cost is options prm.
+ brokerage •
Unchanged price:
Worst-case?
Premium lost, price doesn’t rise

28. Determining Minimum Price With Put Purchase
Select Strike Price: $2.50
Deduct: expected basis at delivery -0.40
premium
transaction cost
Expected Minimum Price $1.89

29. Corn Put Example, 1999 March 26, $2.50 put prem., : $.20/bu.
Min. price:$ basis= $1.90
Sept. 30 put prem.=$.42, fut. = $2.08
Harvest Cash corn = $1.60
Corn priced with puts: added value: $ = +$ Net Price = $1.82
Upward price flexibility retained

30. Corn Put Example, 2000 May 18, $2.60 put prem.: $.16/bu.
Min. price:$ basis = $2.04
Sept. 30 put prem.=$.52, fut. =$2.08
Harvest Cash corn = $1.55
Corn priced with puts: added value: $ = $.36
Upward price flexibility retained, can store, collect LDP, hedge for May 2001
Gain on 600 A. corn: $32,000
Hedge gain: $0.50/bu. or $45,000 on 600 A.

31. If prices had risen sharply:
Corn Put Example, 2000
If prices had risen sharply:
$2.60 put prem., May 18: $.16/bu.
Min. price:$ basis= $2.04
Sept. prices for Dec. corn: $3.60
Sept. 30 put prem.= $0
Harvest Cash corn = $3.25
Corn priced with puts: Net price $ put prem. = $3.09/Bu.
Corn Contracted in May: $2.20/bu.
Difference on 600 A. corn, 85% yld.:$76,500

32. Put Options Position is Similar to Minimum Price contract
Elevator protects position with options
Elevator contract locks farmer into specific delivery location
Pre-harvest contract basis may be greater than actual harvest basis
If prices rise, farmer can follow the market higher
Avoids need to trade through broker

33. Synthetic Put Options Position: Hedge Sale + Buy Call, 1999 Example
March 26, Sell Dec. futures = $2.50
Less expected harv. basis
Hedge price
Buy Dec. $2.50 call
Minimum selling price $1.89

34. Synthetic Put Options Position: Hedge Sale + Buy Call, 1999 Example, Rising Price
Sell March 26, Dec. futures = $2.50
Buy Dec. $2.50 call
Minimum selling price $1.89
September: Dec. futures =
Cash price
Margin call on futures:
Hedge price:

35. Synthetic Put Options Position: Hedge Sale + Buy Call, 1999 Example, Rising Price, Cont.
Hedge price: $2.10
$2.50 Call Value, $3.50 fut
Net price: $ = 2.89
Gain vs. hedge, 600 A.= $71,100

36. Options Fence Sets a floor & a ceiling for prices
Costs less than put purchase alone
Creates exposure to Margin Calls in options mkt.
Involves greater risk exposure if farmer has low yield
Procedure: Buy put & sell higher call
Price can range between put & call
New Generation contracts offer fence

37. Options Fence, 1999 if prices rose sharply
March 26: $2.50 put prem.= $.20/bu.
Sell $2.90 $0.09 prem.
Min. price:$ basis + $.09 = $1.99
Sept. 30 put prem.=$0, fut. = $3.50
Harvest Cash corn = $3.10
Call Margin call: $ =$0.60/bu.
Net Price: $ =$2.39

38. Summary, 1999 Alternatives, Net Price
Add. $ 600 A. $0.00
90,000
$36,000
Harv. Cash Price $1.60
Forward contract
Put Purchase
Synthetic Put
$2.50/$
$3.10
2.10
2.90
2.89
2.39

39. Key Points Cash marketing only restricts opportunities
Strong need to understand options, futures
Basis behavior & spreads are important for use of these markets
Yield risk: must consider in pre-harvest pricing

40. Key Concepts Price risk is substantial: in both directions
There are tools that give floor & flexibility
Pre-harvest behavior of new-crop futures doesn’t follow normal distribution
Creates opportunities
Marketing tools: cut off lower part of income distribution