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The latest in a series of Iowa State University Extension and Outreach videos on crop marketing explores how producers can obtain the best prices for their crops using different storage and pricing strategies.
In “Five Grain Marketing Strategies & Tools for the 2015 Crop,” Steve Johnson, farm management specialist with ISU Extension and Outreach, describes how corn and soybean prices fared at a north central Iowa terminal elevator over a 25-year period. The greatest average return for corn was to store after harvest on the farm unpriced, which gives farmers the ability to hold their grain and sell at a higher cash price the following July.
“On-farm storage always beats commercial storage because commercial storage is more than twice as expensive,” he said. “But in some years, even storing bushels on-farm unpriced wasn’t the most profitable strategy.” He recommends that farmers consider incorporating other marketing tools because selling crops at the highest price doesn’t always mean that they will generate the most return given the costs associated with storage.
For soybeans, the most profitable route was a basis contract, which yielded a slightly better average price than storing the crops on-farm unpriced. (Basis is the difference between the daily local cash price and the nearby futures price on the Chicago Board of Trade.)
Johnson’s source was a study of cash prices at a north central Iowa terminal grain elevator compiled by Farm Futures magazine. Terminal elevators receive grain after it has been inspected and weighed at other terminals and then transfer the grain to another processor, often the final destination.
The video highlights a study comparison for both on-farm and commercial storage of corn and soybeans unpriced from harvest until July. Four marketing strategies and tools are compared to measure net profit or loss: 1) storage hedge using July futures; 2) store and buy a July put option; 3) a minimum price contract (sell and buy a July call option); and 4) a basis contract (sell and buy a July futures contract).
Other crop marketing strategies and tools are explained in further depth in a series of 12 instructional videos available at https://www.extension.iastate.edu/agdm/info/icc.html. They range from four to 16 minutes in length, and include everything from an introduction to crop marketing to futures hedging.
“Understanding the basics can get producers that much closer to selling and buying at the right time and price,” Johnson said.
The video series was developed as part of the Iowa Commodity Challenge in partnership with the Iowa Farm Bureau. This includes an online market simulation game to learn risk management tools such as futures and other options. Participants market 75,000 bushels of corn and 25,000 bushels stored at a central Iowa elevator. All marketing actions must be completed by March 9, 2016 when the net cash price minus commercial storage costs will be determined.
“The game gives players a chance to look at commodity markets and how they work over the course of several months,” Johnson said. “It reflects what is happening in real world markets and gives participants the opportunity to try various strategies and use marketing tools such as futures and options.”
For more information about the Iowa Commodity Challenge, link to the site at www.tinyurl.com/IowaLearn.
Source: Iowa State University
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