Developing Your Personal Grain Marketing Plan JCH April

What is a Marketing Plan? n A marketing plan is a proactive strategy to

Marketing is Important! n The average farm earns 20 -30 cents per bushel (including

Why do I need a Marketing Plan? n Fear and greed are powerful emotions

Tillman Farm Pre-Harvest Corn Marketing Plan Objective: Buy crop insurance to protect my production

Crop Insurance n Crop insurance is like health insurance for your crops. n The

The Facts of Revenue-Based Crop Insurance High Yield Low Yield Covered Tax Problem! Covered

Tillman Farm (2) Decision dates Pre-Harvest Corn Marketing Plan Objective: Buy crop insurance to

Pricing Targets n Choose your minimum price threshold • Loan rate • Cost of

Tillman Farm Pre-Harvest Corn Marketing Plan (2) Decision dates Objective: Buy crop insurance to

Decision Dates How do they work? If I reach a decision date before my

Contract 1 -May 1 -Oct Change 1980 2. 95 3. 49 0. 54 1981

Decision Dates Don’t forget to sell something! But remember your minimum price….

Contract 1 -May 1 -Oct Change 1980 6. 45 8. 12 1. 67 1981

Pre-Harvest Pricing The 25 year seasonal price history is compelling, but consider two more

Pricing Tools I understand the opportunity in pre-harvest pricing, but which pricing tool should

Launch Your Marketing Plan What have we learned? n A plan is discipline -

Launch Your Marketing Plan What have we learned? n Crop insurance is confidence n

The Challenge to you, you need to make your plan! Objective: Buy crop insurance

A continual reminder! n n n Think marketing! Watch markets daily! Know your costs!

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Developing Your Personal Grain Marketing Plan JCH: April 2006 The Ed Usset Model Center for Farm Financial Management University of Minnesota

What is a Marketing Plan? n A marketing plan is a proactive strategy to price your grain that considers your financial goals, cash flow needs, price objectives, storage capacity, crop insurance coverage, anticipated production, and appetite for risk Proactive, not reactive, not overactive

Marketing is Important! n The average farm earns 20 -30 cents per bushel (including gov’t payments). Just 10 cents more per bushel could increase net income by 33 -50%! n Great marketing is not finding the high price. It’s finding an extra 10 -20 cents per bushel with a solid plan that avoids mistakes.

Why do I need a Marketing Plan? n Fear and greed are powerful emotions they will affect your decisions. A solid plan is the only effective weapon against these emotions “Plan your trades, trade your plan”

Tillman Farm Pre-Harvest Corn Marketing Plan Objective: Buy crop insurance to protect my production risk, and have 75% of my anticipated corn crop (based on APH yield) priced by late May. Price 10, 000 bushels at $2. 10 cash price ($2. 50 Dec. futures) using forward contract/futures hedge/futures fixed contract. Price 10, 000 bushels at $2. 22 c/2. 62 f, or by Mar 29, using a fixed-price contract. Price 15, 000 bushels at $2. 34 c/2. 74 f, or by Apr 7, using a fixed-price contract. Price 10, 000 bushels at $2. 46 c/2. 86 f, or by Apr 27, consider options/trend system. Price 10, 000 bushels at $2. 58 c/2. 98 f, or by May 16, consider options/trend system. Price 10, 000 bushels at $2. 70 c/3. 10 f, or by May 27, consider options/trend system. Plan starts on November 1, 2005. Earlier sales will be made at a 15 cent premium to price targets noted above. Ignore decision dates and make no sale if prices are lower than $2. 10 local cash price/$2. 50 December futures. Exit all options positions by mid-September.

Crop Insurance n Crop insurance is like health insurance for your crops. n The better the policy coverage, the lower the deductible, the higher the premium. n Unlike health insurance, the government pays a portion of your crop insurance premium.

The Facts of Revenue-Based Crop Insurance High Yield Low Yield Covered Tax Problem! Covered Low Price High Price

Tillman Farm (2) Decision dates Pre-Harvest Corn Marketing Plan Objective: Buy crop insurance to protect my production risk, and have 75% of my anticipated corn crop (based on APH yield) priced by late May. Price 10, 000 bushels at $2. 10 cash price ($2. 50 Dec. futures) using forward contract/futures hedge/futures fixed contract. Price 10, 000 bushels at $2. 22 c/2. 62 f, or by Mar 29, using a fixed-price contract. Price 15, 000 bushels at $2. 34 c/2. 74 f, or by Apr 7, using a fixed-price contract. Price 10, 000 bushels at $2. 46 c/2. 86 f, or by Apr 27, consider options/trend system. Price 10, 000 bushels at $2. 58 c/2. 98 f, or by May 16, consider options/trend system. Price 10, 000 bushels at $2. 70 c/3. 10 f, or by May 27, consider options/trend system. Plan starts on November 1, 2005. Earlier sales will be made at a 15 cent premium to price targets noted above. Ignore decision dates and make no sale if prices are lower than $2. 10 local cash price/$2. 50 December futures. Exit all options positions by mid-September. (1) Pricing targets (3) Pricing tools & trump cards

Pricing Targets n Choose your minimum price threshold • Loan rate • Cost of production (pre-harvest only) – See appendix for detailed costs of production in Minnesota

Tillman Farm Pre-Harvest Corn Marketing Plan (2) Decision dates Objective: Buy crop insurance to protect my production risk, and have 75% of my anticipated corn crop (based on APH yield) priced by late May. Price 10, 000 bushels at $2. 10 cash price ($2. 50 Dec. futures) using forward contract/futures hedge/futures fixed contract. Price 10, 000 bushels at $2. 22 c/2. 62 f, or by Mar 29, using a fixed-price contract. Price 15, 000 bushels at $2. 34 c/2. 74 f, or by Apr 7, using a fixed-price contract. Price 10, 000 bushels at $2. 46 c/2. 86 f, or by Apr 27, consider options/trend system. Price 10, 000 bushels at $2. 58 c/2. 98 f, or by May 16, consider options/trend system. Price 10, 000 bushels at $2. 70 c/3. 10 f, or by May 27, consider options/trend system. Plan starts on November 1, 2005. Earlier sales will be made at a 15 cent premium to price targets noted above. Ignore decision dates and make no sale if prices are lower than $2. 10 local cash price/$2. 50 December futures. Exit all options positions by mid-September.

Decision Dates How do they work? If I reach a decision date before my pricing target is met, I will price the grain (if prices are above my minimum pricing threshold). n Decision dates are needed to make it a real plan for action n Crop insurance and/or options allow us to forward price with confidence n What’s so special about the March to May period in pre-harvest pricing?

Tillman Farm Pre-Harvest Corn Marketing Plan Objective: Buy crop insurance to protect my production risk, and have 75% of my anticipated corn crop (based on APH yield) priced by late May. Price 10, 000 bushels at $2. 10 Why cash price ($2. 50 Dec. futures) using forward March-April-May? contract/futures hedge/futures fixed contract. Price 10, 000 bushels at $2. 22 c/2. 62 f, or by Mar 29, using a fixed-price contract. Price 15, 000 bushels at $2. 34 c/2. 74 f, or by Apr 7, using a fixed-price contract. Price 10, 000 bushels at $2. 46 c/2. 86 f, or by Apr 27, consider options/trend system. Price 10, 000 bushels at $2. 58 c/2. 98 f, or by May 16, consider options/trend system. Price 10, 000 bushels at $2. 70 c/3. 10 f, or by May 27, consider options/trend system. Plan starts on November 1, 2005. Earlier sales will be made at a 15 cent premium to price targets noted above. Ignore decision dates and make no sale if prices are lower than $2. 10 local cash price/$2. 50 December futures. Exit all options positions by mid-September.

Contract 1 -May 1 -Oct Change 1980 2. 95 3. 49 0. 54 1981 3. 77 2. 87 (0. 90) 1982 2. 93 2. 20 (0. 73) 1983 3. 03 3. 53 0. 50 CBOT December Corn Futures, 1980 -2005 1984 3. 04 2. 78 (0. 26) 1985 2. 64 2. 26 (0. 39) 1986 2. 04 1. 77 (0. 27) 1987 1. 84 (0. 03) 1988 2. 27 2. 95 0. 68 ü 19 years (73%) the market declined 1989 2. 64 2. 39 (0. 26) 1990 2. 70 2. 29 (0. 42) 1991 2. 53 2. 54 0. 01 1992 2. 53 2. 12 (0. 41) ü 7 years (27%) the market improved 1993 2. 43 0. 00 1994 2. 58 2. 14 (0. 44) 1995 2. 63 3. 11 0. 48 1996 3. 33 2. 90 (0. 44) 1997 2. 76 2. 56 (0. 20) 1998 2. 62 2. 05 (0. 58) 1999 2. 31 2. 05 (0. 26) 2000 2. 62 1. 99 (0. 63) 2001 2. 27 2. 11 (0. 16) 2002 2. 20 2. 56 0. 36 2003 2. 33 2. 20 (0. 13) 2004 3. 17 2. 06 (1. 11) 2005 2. 27 2. 06 (0. 21) Average 2. 63 2. 43 (0. 20) ü 14 years the market declined more than 25 cents!

Decision Dates Don’t forget to sell something! But remember your minimum price….

Contract 1 -May 1 -Oct Change 1980 6. 45 8. 12 1. 67 1981 8. 27 6. 46 (1. 81) 1982 6. 78 5. 29 (1. 50) 1983 6. 78 8. 58 1. 80 1984 7. 13 5. 90 (1. 24) 1985 6. 06 5. 14 (0. 93) 1986 5. 24 4. 88 (0. 36) 1987 5. 34 5. 45 0. 11 1988 7. 14 8. 17 1. 04 1989 7. 24 5. 77 (1. 47) 1990 6. 55 6. 05 (0. 51) 1991 6. 09 5. 89 (0. 20) 1992 6. 05 5. 33 (0. 72) ü 9 years (35%) the market improved 1993 5. 96 6. 18 0. 22 1994 6. 28 5. 38 (0. 90) 1995 6. 06 6. 37 0. 32 1996 7. 58 7. 49 (0. 08) ü 12 years the market declined more than 50 cents! 1997 6. 96 6. 21 (0. 76) 1998 6. 17 5. 15 (1. 02) 1999 5. 14 4. 81 (0. 33) 2000 5. 80 4. 90 (0. 90) 2001 4. 34 4. 52 0. 18 2002 4. 56 5. 42 0. 86 2003 5. 53 6. 87 1. 34 2004 7. 45 5. 35 (2. 10) 2005 6. 22 5. 73 (0. 49) Average 6. 27 5. 98 (0. 30) CBOT November Soybean Futures, 1980 -2005 ü 17 years (65%) the market declined

Pre-Harvest Pricing The 25 year seasonal price history is compelling, but consider two more reasons why pre-harvest sales are important 1. 2. 3. Strong seasonal tendency LDP’s give me upside potential in a down market! The sale is made at a price that works for me!

Pricing Tools I understand the opportunity in pre-harvest pricing, but which pricing tool should I use? n Fixed-price tools • • • n Forward contract Sell futures Futures fixed (HTA) Minimum-price tools q Forward contract and buy a call option Buy a put option q Minimum price tool offered by local elevator (? ) q

Launch Your Marketing Plan What have we learned? n A plan is discipline - plan your trades, then trade your plan n A plan is proactive, not reactive, and not overactive n Pre-harvest marketing is very important – history supports it, LDP’s may give you a higher price in a lower market, and does the price work for you?

Launch Your Marketing Plan What have we learned? n Crop insurance is confidence n Set pricing targets and decision dates, track your baseline price n The use of options and technical trading tools (trump cards) offer flexibility with discipline. Use selectively!

The Challenge to you, you need to make your plan! Objective: Buy crop insurance to protect my production risk, and have ___% of my anticipated corn crop (based on APH yield) priced by late May. Price ______ bushels at $______ cash price ($_______ Dec. futures) using ___________. Price ______ bushels at $______c/______f, or by ____________, using _____________. Price ______ bushels at $______c/______f, or by ____________, using ________. Plan starts on _________. Earlier sales will be made at a _____ cent premium to price targets noted above. Ignore decision dates and make no sale if prices are lower than $_____ local cash price/$_____ December futures.

A continual reminder! n n n Think marketing! Watch markets daily! Know your costs! Utilize your analysis! Establishing a price where we make a ‘profit’ is the key! Think profit gaps! What are your trigger prices? Lock in prices! Getting the top price will not be possible! Control your emotions! n Don’t become over-whelmed with data overload! Use strategies that have worked over time and which have strong probabilities behind them!