Side Note: This article was written in 2005, but it is still very much applicable given the current volatile market conditions.
What a missed opportunity! Less than 8 months ago, every one of us had the opportunity to sell soybeans for $10.00/bu and corn for $4.00/bu. Yet the experts tell us that only 15% of the crop was sold at these levels. Today, after a dollar per bushel rally, I sold the last of my soybeans at a whopping $7.14/bu. Only $0.36/bu below my cost-of-production. What went wrong?
While prices were high last summer, none of us were very confident that we would have much crop to sell. On August 31st, half the soybean crop in the province could have been bought for 35 bu/ac, and most of the corn crop appeared in huge trouble from a maturity standpoint. Who would have guessed that we would harvest record crops? Regardless of the crop outcome, however, we had the tools to sell more at a better price. But the clutch was slipping, and that awful smell of burnt clutch is hanging heavy over us still.
How can you sell crop you won’t have at harvest? WRONG ATTITUDE! Use the crop insurance tools available! Most estimates are that 80% of the crop in Ontario is covered by crop insurance. At an 80 % coverage level, 64% of the crop should have been sold at higher levels (80% times 80% = 64%). There is one and only one risk to this strategy – quality. And even that risk can be managed. The only essential elements are that you take out crop insurance, and you buy the floating price option.
Table 1 attempts to explain this further. For simplicity’s sake, I have assumed an average farm yield of 40 bu/ac, at 80% coverage, giving a guaranteed production of 32 bu/ac. As long as you don’t contract more than your guarantee, you have covered your risk. Whatever price you have locked in for your crop, that is what you will be paid. What about quality? Know your grade discounts. If you contract at $9.00 for a grade two, make sure the contract states what the penalty is for a grade 3 or sample grade. With grade discounts specified, all the risk is known.
Table 1 – Forward Contracting Soybeans With Crop Insurance
|Yield: 24/bu/ac||Yield: 32 bu/ac||Yield: 40 bu/ac|
|Forward contract bu||32||32||32|
|Cost / bu||$11.00||$11.00||$11.00|
|Crop insurance claim bu||8||0||0|
|Crop Insurance price||$11.00||$11.00||$11.00|
|Crop Insurance proceeeds||$88.00||$0.00||$0.00|
|Gross income after contract (short) & crop insurance||$288.00||$288.00||$288.00|
|Remaining bushels to sell||0||0||8|
If it is all this simple, why don’t we use this strategy every year, and why did I just sell the last of my soybeans at such a dismal price? Greed and fear! Or perhaps, just too little thought. When soybeans were $10.00/bu, no one would sell until they hit $11.00. GET OVER IT! The coffee shop boys will always have sold at a better price. In fact, using this strategy, most of the soybeans would have been sold by the time they hit $9.00. Reality check………a profit at $9.00 is far better than the $7.00 many growers will settle for now.
One last note. Crop insurance sets the floating price over a three week period, and you may not know your exact yield when this price is set. So the examples used are simplified. But this is manageable risk. As long as you know the rules, you can play this game!
“Shoulda, coulda, woulda.” Hindsight. But we simply must get better at taking advantage of the opportunities that present themselves. Low risk opportunities are rare in agriculture. This is one. Let’s start using it to our advantage!!