1. 60 Farm-Level Grain Marketing MAKING LOGICAL MARKETING DECISIONS: Substituting Costs, Probabilities, & Price Goals For Emotion

2. 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

3. 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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10. 69 May 2005 Soybeans Objectives: $6.37, $6.58, $7.10? Year ago prices Offer contracts

11. 70 Nov. 2006 Soybeans

12. 71 Dec. 06 Corn

13. 72 C. Illinois Crushing Margins 12/29/05 12/30/04 $0.90/bu. $0.79/bu. 12/22/05: $0.91/bu. Soybeans

14. 73 Export Sales 3/16/06 Corn 1.029 Million Metric tons Soybeans 0.381 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

15. 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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17. 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

18. 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.

19. 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

20. 79 Cash-Flow Costs/AOwners Renter Crop-share Buyers Seed, fertilizer,pesticide. $181 $181 $90.50 $181 Insurance, interest, misc. 15 29 15 36 Fuel and repairs 34 34 34 34 Drying 25 25 12.50 25 Custom hire and labor hire 10 10 10 10 Rent and real estate taxes 21 160 0 115 Fixed debt payments 0 11 11 74 Family living, income tax65 52 52 45 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, 2004 1/3-2/3 50/50 Corn March 05

21. 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.)180 90 180 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% Interpretation: @ $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

22. 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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24. 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 $1,111.7 000 $ liabilities $0 $157.3 $54.6 $556.0 000 Net worth $1,931.5 $ 160.0 $155.6 $444.3 Net worth risked (10%) 193,150 16,000 15,560 44,430 Crop acres 600 600 600 600 Net worth risk ratio $322 $27 $26 $74 Max.Loss/bu.,norm. yld. 1.95 0.16 0.32 0.45 Interpretation: A loss of $0.16/bu. (from cash-flow break-even price would reduce renter’s net worth by 10%. 165 bu./A

25. 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.

26. 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

27. 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 $0.45 10% 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?

28. 87 Owners Renter Crop-share Buyers Seed, fertilizer,pesticide. $84 $84 $42 $88 Insurance, interest, misc. 10 15 8 16 Fuel and repairs 16 16 16 16 Drying 0 0 0 0 Custom hire and labor hire 8 8 4 8 Rent, real estate taxes 21 160 0 115 Fixed debt payments 0 11 11 74 Family living, income tax46 34 36 28 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

29. 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 48 24 48 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% Interpretation: @ $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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31. 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

32. 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 Price @ $1.81 May futures @ $2.24 (3/21/06) Basis?

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34. 93 Theoretical Seasonal pattern for C. Iowa July basis Transportation cost to Chicago Storage costs to July delivery $ Under July futures 0.0 0.50 0.25 Oct. Dec. Feb. April June July

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38. 97 Corn Futures Price Differentials over Time 3/21/06 May $2.33 July 2.43 Sept. 2.54 Dec. 2.62 March 2.67 May 2.69 July 2.70 Dec. 072.73 Dec. 08 2.79

39. 98 Closing futures 3/22/04 Corn May3.19 July3.24 Sept.3.19 Dec.3.17 July 053.20 Dec. 05 2.72 Beans May$10.56 July10.51 Aug.10.13 Sept.8.92 Nov.7.87 Mar. 05 7.80 Nov. 056.45 Inverted Market

40. 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

41. 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. futures @ $2.53/bu.) (Last fall? Avg. ?)

42. 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

43. 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.