Grain Marketing & COVID

Let’s state the obvious, this isn’t a typical year and we all know it. For farmers, it is a survival year. Why and what might be done to make it through to the other side of the COVID-19 pandemic? This article will discuss how to build a marketing strategy to assure that the farm continues to the next crop year.

SITUATION

            The prominent factors that are influencing our agricultural economy are also affecting the broader economy, COVID-19 and oil prices. COVID-19 has caused world oil usage to decline starting in late 2019. (Figure 1) The U.S. Energy Information Agency (EIA) projects a decline of over 25% worldwide. World production and consumption of oil stayed mostly in balance until Q4 of 2019 when COVID-19 presented and spread worldwide causing oil consumption to decline. (Figure 2) Many countries prohibited non-essential land travel and air travel dropped to very low levels. This much reduced transportation fuels usage has unbalanced supply and demand and so far, oil production levels have not dropped to reflect reductions in demand. Oil prices likely will not recover until oil stockpiles begin to decline. Since corn usage is approximately 40% to ethanol, transportation and oil are linked to corn demand and price. When the situation will change is unpredictable.

Figure 1. World Oil Usage and Forecast

Figure 2. World Oil Product vs Use

MARKETING PLANNING

This year’s corn and soybean planting is underway in the Midwest with excellent planting weather across most of the region. Planting for most should be completed on time with minimal interruptions. That leads to the possibility of a good to excellent crop if weather after planting cooperates. If most of the nation meets or exceeds their actual production history (APH), this could place greater downward pressure on grain prices. You may be able to survive an average to high yield year, even with low prices. But what if you have a yield shortfall, and grain prices do not recover? With survival in mind, let’s discuss steps in marketing planning

First, review your input expenses. Cash flow planning earlier this year probably did not consider COVID-19 impacts. Reassess that cash flow and adjust as appropriate. There are two sides to the cash flow expenses and income. Analyze each input expense to ensure you are achieving optimum, not maximum,maximum; yields based on current prices and input costs. Be certain to include cash expenses such as property taxes, lease payments, and family living.

After reassessing your input expenses, r review the potential income sources for your farm. The first source of income should be grain sales. Calculate a minimum cash price for each crop for a range of expected yields. TheseThis cash flow price should be the lowest price you need to obtain in order to pay for your input expenses. If these cash flow prices are above current or expected market prices, review costs again and make additional cuts without dramatically sacrificing yield.

Another source of income may be off-farm income. The final source of income for your farm may be U.S. government programs. However, payment each farm or ranch may receive is unknown right now. Some of these programs include the Paycheck Protection Program, the Pandemic Unemployment Assistance program and cash payments from the U.S. Department of Agriculture. Farm Bill programs, and crop insurance may also provide additional income if markets remain low.

 If no further costs can be reduced or off-farm income can be earned, make an appointment to meet with your lender to discuss what to do if higher pricing opportunities don’t seem likely. In this environment, loan consolidation, especially at low interest rates, can be an appropriate action. Shorter-term loans might be collateralized with real estate to stretch loan payments and improve cash flow.

Next, develop a written plan that includes prices at or above your cash flow price per bushel and date triggers to help you sell throughout the year. Keep yourself accountable by sharing your plan with grain buyers, family and farm partners. The minimum prices and bushels planned to be sold need to bring in as much cash as you will need for the year. Crop producers should not ignore making sales at higher prices when available, but are trying to make sure they recapture all of their cash expenses first.

Finally, implement the marketing plan and do not let emotions derail the plan. Most years prices will follow a pattern where prices peak in June or July and later prices will trend down into harvest. In this economic environment, crop producers will want to maximize income. Trying to guess when the market peaks is difficult and likely to be incorrect, and may have already done so.

CONCLUSION

            This year is shaping up to be a survival year for crop producers. Crop producers need to know at what crop price they will recapture all of the cash they will spend this year. Implementing a marketing plan to ensure that takes place is a survival strategy that can keep the farm business intact with no additional debt for a better year next year.

Sources:

  1. Use of oil—U.S. Energy Information Administration (EIA). (n.d.). Retrieved April 22, 2020, from https://www.eia.gov/energyexplained/oil-and-petroleum-products/use-of-oil.php
  2. Short-Term Energy Outlook—U.S. Energy Information Administration (EIA). (n.d.). Retrieved April 22, 2020, from https://www.eia.gov/outlooks/steo/report/global_oil.php

Crop Marketing Plans with Yield Uncertainty

Robert Tigner, Nebraska Extension Educator,

Jessica Groskopf, Nebraska Extension Educator,

Cory Walters, UNL Extension Grain Economist

Due to large global ending stocks of corn (340.41 MMT) and soybeans (99.05 MMT), news of flood damage has not affected the futures price of these commodities as one might have expected it to. This is a challenge for farmers facing flood damage, as your revenue will be impacted by both lower than usual yields and possibly lower prices and cost incurred due to flooding. This article will discuss ways to write and implement a pre-harvest grain marketing plan that considers greater yield uncertainty due to flood damage.

Farmers effected by 2019’s early spring flooding are likely to have increased yield risk from changed soil characteristics, excess moisture or late planting. The following are steps for planning 2019 grain sales.

  1. Assess anticipated production – Depending the extent of the damage and the size of the farm, there are likely to be four categories of yield variation.
    1. Category 1: likely normal production – use actual production history (APH) as yield estimate.
    1. Category 2: damaged but likely or planted normally – production may be slightly reduced from APH.
    1. Category 3: damaged, late planted – production will occur, but too many variables are present to estimate production.
    1. Category 4: damaged, prevent plant – no production or crop planting is after the insurance period.

Once you have categorized the damage, estimate the total production in each category.

  • Determine the marketing percentage – The most difficult decision for flooded farmers will be the percentage of estimated production that you are going to market. Contracting more grain than you produce can result in a lower revenue if you have to pay a “buy back” fee to the elevator, or buy bushels from a neighbor to fulfill your contracts.

Remember, you do not have to sell any grain prior to harvest. However, corn and soybean prices are traditionally higher during the growing season than at harvest.  You may want to adjust your marketing percentage throughout the year as you see how your crop progresses.

Basis.  Areas impacted by the flood may offer a larger than normal basis to incentivize shipments of grain from a further distance to their elevator.  Use this to your advantage by contracting basis if the offered harvest basis is higher than the expected harvest basis.  Your basis marketing percentage will be held back by expected production. 

  • Determine the marketing contract – There are several types of contracts you can use to sell grain, some of which require delivery of the grain and others that do not. If you are less confident in your yield estimate, you may want to use options and futures hedging which provide price protection, but do not require physical delivery of the commodity.

If you are comfortable with guaranteeing delivery, you can use a forward pricing contract, hedge to arrive (HTA), minimum price contract or basis contract. These contracts are often available through your local elevator.

  • Set price targets – Given greater yield uncertainty, it is important for your pre-harvest marketing plan to set realistic price targets. If you set your price targets too high, you may miss opportunities to price grain at its seasonal high.  According to the April USDA World Agriculture Supply and Demand Estimates (WASDE) predicts cash corn prices to be $3.40 to $3.70 per bushel and cash soybean prices to be $8.35 to $8.85 per bushel.  
  • Set sales deadlines –The December corn contract and the November soybean contract have slowly been trending lower since January 1. If your early 2019 price targets have not triggered sales, you will want to set a secondary trigger in the form of deadlines to insure that some grain is sold during the growing season when prices are traditionally higher.