Futures Markets: Where do They Fit in Your Marketing Plan?

Futures Markets: Where do They Fit in Your Marketing Plan?

April 3, 2009

This is one in a series of articles from specialists at the Panhandle Research and Extension Center on ag decisions in this time of economic undertainty.

Crop producers in Nebraska have a number of market options to consider each year. The proper use of marketing tools and the timing of sales are critical to successful marketing. The keys to a good marketing plan are

  • knowing what it cost to produce the crop — both cash costs and total costs,
  • understanding the market,
  • setting sales goals, and
  • making sales when those goals are reached.

Marketing Options for Corn

For corn producers, the highest prices occur each year between February and July. In the last 10 years, two years were exceptions — 2002 and 2006. Knowing the markets and having tools in place to sell when you want may make the difference between capturing a profitable price and losing money on your corn crop.

Over the past 10 years, there were only two years when a corn producer did not have an opportunity to sell above $2.70 per bushel, and only three years when there was no opportunity to sell above $3.00 per bushel. In most years, there are a number of marketing opportunities, including futures, options, cash forward contracts, and cash marketing after harvest.

Since early last summer, the opportunities for cash forward contracts have been a little more difficult to find. In some cases, cash contracts were not available when prices moved toward record highs. As of early April, cash contracts for the 2010 crop were still either limited or not available. With this tool unavailable, it may be a good year to look into setting up a hedging account in case the cash contracts are not available this summer.

With a view toward the next few years, there may be some real opportunities to enter into the futures market in the next few months. Hedging the corn crop might be a way to capture the typically higher prices between now and mid July. A key to hedging crops is to stick with the hedge even if prices move much higher than anticipated. This will take discipline as the margin calls come in and the market moves higher.

Producers who placed a hedge on corn at this time last year were able to lock in $5 corn and looked to be in great shape. In late June, weather scares pushed the corn price to nearly $7 and producers who had hedged in March were concerned about the margin calls. However, those same producers were pleased to have that $5 hedge when harvest rolled around and corn was in the $3.50 range.

Recommendations

There will be weather-related increases in the corn market this spring and early summer, as there are nearly every year. Be prepared to take advantage of these opportunities and sell some corn when prices are at historical highs.

Now is the time to sit down and determine what your costs will be this year and develop your marketing plan. Once a marketing plan is developed, regularly communicate with your lender, buyer, and broker (if necessary) so you can make timely sales and put the market to work for you.

Paul Burgener
Ag Economist, UNL Panhandle REC