By Tom Collins
GUELPH — Not selling crop before harvest and holding onto grain for too long are two of the biggest mistakes that crop farmers make, says a University of Minnesota grain marketing economist.
Ed Usset told a packed room at the SouthWest Agricultural Conference last month that farming is a lot like hockey. Hockey teams do much better when they don’t go offside on a breakaway or take a dumb penalty at the wrong time in the third period.
“You don’t have to skate any faster or shoot any better to improve the play of your team. You’ve just got to knock out your mistakes,” he said. “The best teams are ones that minimize mistakes.”
That same philosophy is true for farmers, he added. Minimizing mistakes will make farms more profitable. When it comes to marketing grain, it’s not difficult to cut down some errors. He noted that commodity prices are lowest at harvest and highest in the spring. Every farmer should take advantage of that.
Usset’s strategy means selling 75 per cent of corn and soybeans by the middle of June. This year Usset hopes to sell 75 per cent of his corn by June 17 in six increments. He has placed an order to sell 10,000 bushels if price hits US $4.05/bu before March 10, another 10,000 bushels if price hits US $4.35/bu before April 8, another 15,000 bushels if price hits US $4.65 before May 8, 10,000 bushels at US $4.95 before June 6, and 10,000 bushels at $5.25 on or before June 17. He’ll sell the other 25 per cent at harvest. He won’t sell if prices are lower than US $3.75.
While forecasting price is never a sure bet, Usset has found that the strongest price correlation in farming is in corn. Looking at the last 20 years of data for December corn, Usset focused on May 1 and Oct. 1 prices. In any given year, on average, the corn price would be US 33 cents per bushel lower on Oct. 1 than on May 1. That average includes five years in which the price was actually higher on Oct. 1.
Year 2012 saw the biggest increase as the season went on. There was a North American-wide drought and corn prices went through the roof. That year, the corn price was $5.39 on May 1 and $7.57 on Oct. 1.
“The tendency for December corn to go lower is the strongest (tendency) I can find in any agricultural commodity I’ve looked at,” he said. “I’ve looked at sugar and cocoa and hogs and cattle. Nothing is as strong as this tendency for corn to go lower from spring to fall.”
Soybeans have declined in price when comparing May 1 to Oct. 1 in 12 of the last 20 years. By October, on average over those years, the average price of soybeans had dropped by US 33 cents per bushel.
Overall, a U.S. farmer who sold 75 per cent in advance and 25 per cent at harvest, would have made US 13 cents more per bushel on average for corn and 24 cents more per bushel on average for soybeans than a farmer who sold all of his crop after it was in the bin.
Another big mistake is lack of an exit strategy. Usset said some farmers will keep grain in the bin for too long and be forced to sell it when they need room for the next harvest crop. Holding grain in storage for too long breaks his 11th commandment of grain marketing: “Thou shall not hold unpriced corn or soybeans in the bin beyond July 1” in the year after harvest.
“If you have grain in the bin from last year, what are you waiting for? You’re waiting for 25 cents more. If next week, something happens in the news and the cash price of corn actually goes up 25 cents a bushel, what would we do?” he asked rhetorically. He got lots of laughs when he added: “We’d wait for 25 cents more.”
Farmers who don’t have an exit strategy with a price in mind have some ugly stories they don’t want to tell. If price goes down 30 cents, then these farmers only want the 30 cents back before selling.
And that’s not a strategy. “This is a real problem,” he said. “I have found this, time and again, that we don’t know what it is we’re waiting for.”
He said farmers who like to hold on are rewarded, on average, once every five years with huge profits. However, they lose on profit the rest of the time. “Those other four years, those are some really ugly years.”
Big marketing mistakes: Not selling early and leaving grain too long in the bin
By Tom Collins