What is your grain marketing strategy?

At the end of February I received a few late afternoon calls about the corn market. These calls usually occurred after the market closed, when I used the quiet time to prepare for speaking engagements and writing. It didn't take long for the farmers to understand the reason for their call: they were in trouble.

The calls usually went something like this: “Al, I had a basic contract that I extended from March to May. It was 40 cents below March corn, and now I'm 56 cents below May. And now…well, the cash price is so low I don't know what to do. I can’t support my cash flow with $3.80 worth of corn.”

The calls came from the other side of the Corn Belt. The callers were frustrated and embarrassed. I told them that, to be honest, I was also surprised at how low corn futures prices had fallen.

Then I started asking questions. A lot of questions. “How many bushels did you produce?” How many were under the basic contract? How much money did you prepay for the elevator? Do you use futures or options?”

Most had produced 10,000 to 50,000 bushels; some had 300,000 or more. Some refused to say. Farmers told me they had 30 to 50% under the basic contracts. The most difficult cases were when the farmers had fulfilled the basic contracts 100% since the harvest and had already rolled them twice! Some of the elevators had no money prepaid; some up to 70%. Almost every caller had never used futures or options or knew how the futures and options markets work.

To some who had received the 70% advance, I didn't have the heart to tell them that if the price dropped another 20 cents they would be on the verge of receiving margin calls.

After listening to their situations, I always came to the most important question: “What was your marketing plan?”

Every single one had the same answer: “I had no plan.”

This graph shows that corn reached a normal seasonal high in the first half of summer. Corn futures trended lower in late summer and then recovered into October. Prices then declined in late November and continued their decline into the first quarter of 2024.

Chart source: Chicago Board of Trade

Instead they told me…

• They hoped grain prices would rise as they had in the past two years and planned to sell as soon as prices rose.
• They “waited for the top.”
• They didn't want to sell for tax reasons. (Well, your income tax problem is solved.)

As it turns out, in addition to being a corn trader and grain consultant, I now also work as a part-time consultant. After several long conversations, I wrote a cheat sheet with three alternatives that I would suggest to the next caller. (One caller who took notes called them “the least worst alternatives.”)

Here it is:

• Alternative No. 1: Price the grain. Take your shot. Move on. If you don't like 56 cents below May corn futures, then you won't like 68 cents below July corn futures. If you don't act, you're still digging a deeper hole. In ideal weather, cash corn can fall from $3.80 to $3.40 or less.
• Alternative No. 2: Continue with the July corn contract but place a stop. This would price you out if July corn futures fell below a certain price level. This would limit your loss but also give you the opportunity to make more on your corn if corn futures were to rise in July. The danger with this plan is that you could get stopped out and then see a price spike.
• Alternative No. 3: Sell ​​the corn and take some of the money to buy a call option (or have the elevator buy it). I recommend a December corn call option. However, this may not be to your advantage. You could lose your call option premium if the summer weather was ideal and we ended up with a trendline return. In this scenario, corn prices could fall further. Keep in mind that if you lost money on the call option, you would lose less money than if you rolled over the underlying contract over and over again.

I was reluctant to write such a negative article, but I wanted to make many farmers realize that they are not alone. I don't intend to mock the farmers who called. Believe me, I understand the drama of markets and the dark places they can take you. But that's exactly why it's so important to have a plan and knowledge.

There are alternatives, even in a very difficult situation. Most farmers I spoke to were frustrated but didn't go bankrupt. They can learn from their difficulties and do better next time.

The next challenge now is to avoid this happening again next year or sometime in the next four years.

This chart shows that soybean futures reached a normal seasonal high in August 2023. Soybean futures then fell lower, hitting a crop low in October. Prices recovered into November and then continued their downward trend until the first quarter of 2024.

Chart source: Chicago Board of Trade

Here are three suggestions to help you prepare:

1. Stay consistent. I received several calls from farmers who sold in advance in 2020 and had to honor contracts that were below market price. As a result, farmers stopped providing inputs. But I strongly believe that it is important to sell 30 to 50% of the crop in advance. In more than 40 years of advising farmers, it has worked in over 80% of cases. I refine the percentages each year, but always set grain prices higher with each spring or summer rally.
2. Spread your risk. This is written specifically for farmers who have 100% of their grain under base contracts. In addition to selling a percentage upfront, consider selling a percentage post-harvest each week. You can also work with an elevator, which allows you to sell grain and use part of the proceeds to buy call options. (I call these “calls for courage.”)
3. Learn more about grain marketing. You don't grow crops – you grow money. Learn how to separate futures and basis choices. If you're unable or unwilling to invest your time in learning more about marketing, find someone in your business who can. Make it someone’s job because it is an essential job. If your current frustration level is high enough, it's time to put this into action. You can do it.

A grain marketing debacle

Every year we host our Kluis Grain Trading Academy for farmers and their farm teams. One course is about grain marketing debacles. A real-life example I teach involves a farmer in the 1980s who extended base contracts for 10 months and received $1.20 per bushel for his corn the following August. It was corn that he could have sold from the combine the previous year for $2.60.

The farmer came to me with his lawyer to take legal action against the elevator. I refused to take his side because it wasn't the elevator's fault. The farmer was the decision maker driving the base contracts.

The lesson we teach our students: As a business owner and entrepreneur, you are responsible for your actions. You need to know what you are doing before taking any action (especially those that may have financial implications) because the consequences are yours, good or bad. That's the hard side of being your own boss and the price of independence.