Jeff Peterson - First Steps in Marketing

Jeff Peterson Author

11/20/2020 Added

22 Plays

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Grain Marketing

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[00:00:03.430]I'm Jeff Peterson with Heartland Farm Partners.
[00:00:06.170]I'm also an assistant professor of practice
[00:00:08.690]at the University of Nebraska at Lincoln,
[00:00:11.190]teaching grain marketing
[00:00:12.640]and also grain merchandising to students.
[00:00:15.960]And one of our passions is to just help everyone
[00:00:18.940]understand how to better use the commodity markets
[00:00:22.050]to market their grain.
[00:00:23.700]Today, I wanna spend a little time talking to you
[00:00:25.810]about what are some of the first steps in marketing
[00:00:29.110]and putting together that foundation
[00:00:31.240]for your marketing plan.
[00:00:33.470]So, to get started today to do this,
[00:00:36.610]it's gonna focus on three really main points.
[00:00:39.980]We're gonna talk about why does marketing matter
[00:00:42.830]in your operation?
[00:00:44.040]And then from there,
[00:00:45.530]we're gonna talk about why do we physically need to focus
[00:00:49.830]on the two big fears to be able to make it
[00:00:52.230]so we're comfortable marketing, that fear of not producing?
[00:00:55.750]And then also, how do we conquer that fear of missing out
[00:00:59.360]on higher prices or a better basis?
[00:01:02.270]But let's first talk about the whole idea
[00:01:04.990]of why does marketing matter?
[00:01:07.090]And what I've done is I've laid out
[00:01:08.910]a profitability matrix for you.
[00:01:11.580]On the left hand side, are different prices.
[00:01:14.600]Across the top, are different yields.
[00:01:16.620]And I've based this off of corn.
[00:01:19.270]And then I came in and I said,
[00:01:20.650]let's take a breakeven of $501 breaker.
[00:01:25.700]That's what your cost is to produce this crop.
[00:01:28.510]And I said let's use a yield of about 134 bushel yield.
[00:01:33.160]And just to give you an idea of different points in here
[00:01:38.160]of whether you'd make or lose money.
[00:01:40.380]And I guess the way I like to think about marketing
[00:01:43.500]is that depending on where we sell on price
[00:01:46.830]and depending on what the yield is,
[00:01:48.680]depends on what our return is gonna be.
[00:01:51.000]And marketing makes all the difference in the world
[00:01:53.830]on whether you're gonna make or lose money.
[00:01:55.600]So, if you look at this area that I'm drawing in here
[00:01:59.150]above my red line, that's gonna be an area...
[00:02:01.630]If you made sales in that area, you're gonna lose money.
[00:02:05.060]However, if you made different marketing decisions
[00:02:08.410]and you made those sales down here in the green area,
[00:02:11.440]that's gonna be an area in which you're gonna make money.
[00:02:14.210]And that's all within the control of the marketing side
[00:02:17.740]of when you physically go ahead and sell.
[00:02:20.950]Now, how much of a difference can marketing make?
[00:02:24.670]And we'll focus on corn.
[00:02:26.300]That's a big question that ultimately I get many times.
[00:02:29.630]And we went back and did a study,
[00:02:31.840]and we looked at the price action in 2008 through 2018.
[00:02:39.010]And we looked at the futures prices.
[00:02:41.210]And the reason we selected that timeframe
[00:02:44.200]is that 2008, we know that at that point,
[00:02:47.240]ethanol was coming into play.
[00:02:48.710]And we knew that because we are now using corn
[00:02:51.800]and using it for energy.
[00:02:53.290]It traded a little bit.
[00:02:54.940]It changed the way in which the markets traded.
[00:02:57.210]So, that's why we started in the 2008 area
[00:03:00.160]in our study we did in 2018.
[00:03:02.897]And we should go back through and do it again here.
[00:03:06.040]And we'll do that in the future.
[00:03:08.660]But if we look at selling
[00:03:10.160]during that March through June timeframe
[00:03:13.340]before right around when you plant your crop,
[00:03:17.180]but before harvest,
[00:03:18.270]and we compare it to making sales at harvest time,
[00:03:21.380]what we find is during that period of time,
[00:03:23.720]the average higher price you'd have got by making
[00:03:26.600]that pre-harvest sale was 45 cents per bushel.
[00:03:29.830]So, you can then take that
[00:03:31.020]times your amount of bushels you're producing.
[00:03:33.720]It gives you an idea of how much additional money
[00:03:37.620]could be made by making those pre-harvest sales.
[00:03:40.230]And then we said we realize that many people have storage,
[00:03:44.300]so we need to compare how does selling
[00:03:46.680]during that March through June timeframe, pre-harvest,
[00:03:49.980]how does that compare to selling
[00:03:51.500]in that March through June timeframe, post-harvest?
[00:03:55.180]And what we had found
[00:03:56.250]is that there was about a 25-cent difference,
[00:03:59.000]meaning selling pre-harvest was still 25 cents better
[00:04:02.640]than post-harvest.
[00:04:04.580]And so, what we can see
[00:04:05.600]is that there's definitely additional revenue to be had
[00:04:09.440]by making those pre-harvest sales and selling ahead.
[00:04:12.950]Now, let's dig in though.
[00:04:14.540]In order to do that, though, there's two fears
[00:04:16.570]that we have to be able to overcome
[00:04:18.740]if we're gonna make those pre-harvest sales.
[00:04:21.100]We have to get over that fear of not producing.
[00:04:23.890]And let's talk about that one first.
[00:04:26.160]And anytime we talk about that fear of not producing...
[00:04:29.260]And that's a very real fear.
[00:04:31.520]And there's just something about it's harder for many people
[00:04:35.830]to make sales when they know they don't have those bushels
[00:04:38.400]in the band.
[00:04:39.320]We really wanna walk through and talk about a way
[00:04:42.060]to get over that fear is to think about your crop insurance.
[00:04:45.040]And when we look at the crop insurance side,
[00:04:47.820]what we're looking at is a revenue-based insurance
[00:04:51.000]or RP crop insurance.
[00:04:53.070]And if we use this example
[00:04:54.650]where the actual production history is 200 bushels the acre,
[00:04:58.770]the crop insurance percentage
[00:05:00.400]or your level of coverage is 75%,
[00:05:04.230]that gives us an insured yield.
[00:05:06.020]So if we take the APH times our crop insurance amount,
[00:05:10.520]that then is going to give us an insured yield
[00:05:13.010]of 150 bushels the acre.
[00:05:15.400]Now, the way RP coverage works
[00:05:18.680]is that it looks at two periods of time.
[00:05:21.410]It looks at the February average of December futures,
[00:05:24.860]and then it looks at the October average
[00:05:28.080]of December futures.
[00:05:29.210]So, you get a spring and a fall price.
[00:05:31.020]So, let's say the spring price, the February average is $4.
[00:05:35.310]What that would mean is our minimum revenue guarantee,
[00:05:38.400]if we didn't produce any crop, would be $600 an acre.
[00:05:41.940]How did we get that?
[00:05:43.380]We took the insured yield of 150 bushels the acre
[00:05:47.500]times the February average of $4,
[00:05:50.276]and that gave us our $600 per acre.
[00:05:53.920]Now, let's say at that time, we said, "You know what?
[00:05:56.090]We think that's a good price."
[00:05:57.360]We sell 150 bushels the acre, okay?
[00:06:00.970]We sell up to our insured level.
[00:06:03.290]What did we get for our price?
[00:06:04.647]$4 futures, the same as what the February average was.
[00:06:08.590]And let's say we did it on a cash contract,
[00:06:11.230]the basis, that difference between your cash price
[00:06:14.587]and your futures price was 40 cents,
[00:06:17.150]so we ended up getting $3.60 for the corn that we sold.
[00:06:21.960]And I just gave you a look here of the calculation
[00:06:25.080]of what that minimum revenue guarantee is.
[00:06:29.230]Now, let's say that our worst fear was materialized,
[00:06:33.650]and that worst fear is we produced zero yield
[00:06:37.040]and the price went up.
[00:06:38.880]We sold when the futures were $4,
[00:06:41.450]and now by the time we get to harvest,
[00:06:42.677]the price went up to 4.50.
[00:06:44.940]Let's look at first how the crop insurance would work,
[00:06:47.840]and then let's next talk about what are your choices
[00:06:51.320]on how you deal with those bushels that you sold?
[00:06:54.710]So, if the harvest price,
[00:06:56.220]and that would be the October price of the December futures,
[00:07:00.350]would be $4.50, our harvest guarantee then would be $675.
[00:07:07.380]How did we get that?
[00:07:08.900]200 bushel the acre APH times our 75% crop insurance
[00:07:13.700]times our fall price of $4.50 gives us $675 per acre.
[00:07:22.790]Now, we compare that to our minimum revenue guarantee
[00:07:25.760]from the spring of $600, and you can see
[00:07:28.920]our revenue guarantee went up $75.
[00:07:31.990]That's just how the insurance works.
[00:07:34.850]What our coverage pays, it's the higher of the harvest
[00:07:38.020]or the minimum.
[00:07:38.853]In this case, it'd be the $675.
[00:07:41.680]Doesn't cost us any more premium.
[00:07:43.570]That's all built into the original premium
[00:07:46.630]we'd have paid for the contract on this insurance.
[00:07:49.800]So, our revenue guarantee is $675 per acre.
[00:07:53.610]We end up getting an actual yield of zero.
[00:07:56.480]So, now let's talk about how do we handle that zero?
[00:08:01.800]What our insurance payment is gonna be,
[00:08:04.010]it's gonna be the $675 per acre minus any premiums
[00:08:10.240]that we had is what we're gonna get paid
[00:08:12.330]from the crop insurance side.
[00:08:14.610]We then take a look at what are our options?
[00:08:17.170]For those 150 bushels the acre that we sold,
[00:08:20.240]what are our choices?
[00:08:21.140]Now, I'd always encourage you
[00:08:23.070]before you ever think about selling pre-harvest,
[00:08:25.650]before you physically harvest the crop,
[00:08:28.290]you need to have a discussion with your grain buyer.
[00:08:31.400]And with your grain buyer,
[00:08:32.530]you just wanna talk to them about what happens
[00:08:35.240]in the event that I can't or I don't produce those bushels
[00:08:38.650]and I can't deliver them?
[00:08:41.610]There's really three choices out there
[00:08:44.190]or three alternatives out there in regard to those sales.
[00:08:48.790]I would say probably 80%, maybe even 85%
[00:08:52.260]of your grain buyers will let you roll that obligation
[00:08:55.590]to the next crop year,
[00:08:56.830]but it does depend upon the buyer's policy.
[00:08:59.700]You could find another person to fill your contract,
[00:09:02.880]but in many cases,
[00:09:03.870]that isn't really probably a really good option.
[00:09:07.220]So, your other real probably option
[00:09:09.190]would be to buy out of the contract with the grain buyer.
[00:09:12.170]So, let's walk through what a buyout on that contract
[00:09:14.890]with the grain buyer would look like.
[00:09:17.250]So, we're back to our example here.
[00:09:19.270]We sold 150 bushel the acre.
[00:09:22.420]We did it when prices were $3.60 cash.
[00:09:26.890]Price now goes up to $4.50.
[00:09:30.230]So, the first thing we look at is we look at that buyer.
[00:09:35.520]What is their price of their grain?
[00:09:37.330]So, for a 4.50 futures,
[00:09:39.540]and we'll say that the basis,
[00:09:41.160]that difference between cash and futures was 40 cents.
[00:09:44.580]So, then their current cash price would be $4.10.
[00:09:48.580]Now, most of them will add a slight fee.
[00:09:51.120]Some of them won't, but they might add
[00:09:53.120]an additional 10 cents per bushel
[00:09:55.400]to what their normal price is.
[00:09:57.140]So, now what they're gonna say
[00:09:58.680]is if you wanna buy back your bushels that you sold
[00:10:01.030]because you didn't produce them,
[00:10:02.680]you're gonna have to do that at $4.20.
[00:10:06.270]Now, how does the math actually work on that?
[00:10:08.980]And what's it really gonna cost?
[00:10:10.810]So, we take our original sale price, which is $3.60,
[00:10:16.110]and then our cost to buy back
[00:10:17.800]is the price that we're buying back the bushels at,
[00:10:20.770]the 4.20 minus where we originally sold them at 3.60,
[00:10:25.390]and that's gonna amount to 60 cents per bushel
[00:10:28.570]to buy back those bushels.
[00:10:30.610]How many bushels did we have?
[00:10:32.530]150 bushels per acre is what we had.
[00:10:35.530]So, that's gonna be 60 cents times 150.
[00:10:39.980]That's gonna be $90 per acre is what it's gonna cost us
[00:10:43.360]to buy back that contract.
[00:10:45.340]Now, where's that money gonna come from?
[00:10:47.100]That's always the biggest concern.
[00:10:49.000]Well, your crop insurance payment was $675 per acre.
[00:10:53.770]So, you're gonna have to take $90 out of that
[00:10:57.050]to physically go ahead and buy back those bushels
[00:10:59.560]that you sold, if you had a complete loss.
[00:11:02.260]So in this case, your net revenue,
[00:11:04.637]$675 minus your 90, cost to buy it back,
[00:11:09.240]675 was what your revenue guarantee
[00:11:12.210]was on your crop insurance.
[00:11:13.900]You'd have net revenue of $585.
[00:11:18.530]Now in the spring, when we were thinking
[00:11:21.130]about making that sale, our minimum revenue guarantee
[00:11:24.820]from the crop insurance side was $600.
[00:11:28.010]You can see by the market going up, it went up to 675.
[00:11:33.030]So, when we get all said and done,
[00:11:34.490]we're gonna come in pretty close
[00:11:36.170]to what our minimum revenue guarantee was
[00:11:38.950]even after we bought back those bushels.
[00:11:41.830]I just gave you a formula down here
[00:11:44.660]so you could see how we calculated our net revenue numbers.
[00:11:50.190]So, now let's move on to our next fear.
[00:11:51.890]So, we talked about how to use crop insurance
[00:11:54.900]to get the revenue in the case
[00:11:56.630]that you don't end up producing the crop.
[00:11:58.870]Now, another fear that's very real
[00:12:01.280]that we have to overcome in order to be able
[00:12:03.460]to get comfortable making pre-harvest sales
[00:12:06.190]is that fear of missing out on higher prices
[00:12:09.180]or that fear of missing out even on a better basis.
[00:12:13.330]So, let's just get our mind wrapped
[00:12:15.350]around the different components of price.
[00:12:18.840]So, if we look at the cash price,
[00:12:20.660]what we know is that that's made up of a futures price
[00:12:23.870]and that's made up of a basis.
[00:12:26.070]And if we go back and look for just the definition of basis,
[00:12:29.440]we can see that basis is equal that cash price
[00:12:32.640]minus that futures price.
[00:12:34.080]So, we have those things in our mind.
[00:12:37.580]So, now what we wanna look at is we wanna go back in
[00:12:41.320]and we wanna say, "Now, to get comfortable with knowing
[00:12:46.950]and getting over that fear of missing out
[00:12:48.700]on higher prices,
[00:12:49.533]we wanna first look at when do higher prices
[00:12:52.800]typically happen, or to say that another way,
[00:12:55.920]when do the highs in our marketing window of time
[00:13:00.690]typically occur?"
[00:13:02.190]So, we're gonna walk through two examples.
[00:13:05.010]This first one, what we looked at is we said
[00:13:07.220]okay, if we're looking at the timeframe
[00:13:09.270]from January through November, okay, really.
[00:13:12.740]So, you think about it.
[00:13:15.169]You're gonna plant here in April into May.
[00:13:17.770]And so, we're looking at a few months before,
[00:13:20.110]and we're saying all the way in through harvest.
[00:13:22.890]We looked at the timeframe of 1996 through 2018.
[00:13:28.060]And what we looked at is we looked
[00:13:29.620]at the December futures closing prices,
[00:13:32.360]where the highs were, okay?
[00:13:35.550]And what you can see is that we mapped out here,
[00:13:37.880]for each of the individual months,
[00:13:39.420]the amount of times that the high during that window of time
[00:13:43.600]occurred during each of those months.
[00:13:46.130]And as we summed everything up,
[00:13:48.400]what we found is that 92% of the time,
[00:13:52.020]the high occurs before October, November.
[00:13:54.950]Now, you'll notice if we take 92% and we add the 9 to it,
[00:13:59.530]that takes us up to 101%.
[00:14:02.250]The reason that's that way
[00:14:03.390]is 'cause I did round some of these percentages
[00:14:06.340]to the nearest whole number.
[00:14:08.160]But the point we wanna take here
[00:14:09.770]is that these pre-harvest sales,
[00:14:11.900]you would have a higher price 92% of the time.
[00:14:15.630]That would be if you were having to sell,
[00:14:17.410]comparing pre-harvest to harvest sales.
[00:14:20.730]Now, what about if you have bands,
[00:14:23.030]you have the ability to put those bushels in the band.
[00:14:26.120]So, let's lay out our times here.
[00:14:28.170]You'll notice it goes from January, okay?
[00:14:30.530]Through the end of the year.
[00:14:32.250]And what that's saying is you've harvest your bushels.
[00:14:34.910]You can put it in a band,
[00:14:36.490]and then let's say you could hold all those bushels
[00:14:38.810]all the way out to next harvest.
[00:14:40.950]And we compared these prices from 2008 through 2017.
[00:14:47.150]What we found in there is that the pre-harvest sales
[00:14:50.920]that you make would be the high 88% of the time.
[00:14:55.010]So, if you think about it,
[00:14:56.040]the tendency is if you wanted to kind of work
[00:14:58.970]on the probabilities is that if you're dealing
[00:15:01.960]with pre-harvest sales compared to harvest,
[00:15:05.220]over 92% of the time, you're better off making the sales
[00:15:09.180]pre-harvest.
[00:15:10.250]If you're dealing with bushels that you can go to the band,
[00:15:12.970]over 88% of the time, the high occurred
[00:15:16.320]in that pre-harvest timeframe.
[00:15:17.810]So, you can get comfortable knowing, you know what,
[00:15:20.970]the highs normally happen before we get to harvest.
[00:15:25.330]The reason is the market tends to pay us the most
[00:15:28.830]when it knows the least.
[00:15:30.470]And it knows the least in and around that planning timeframe
[00:15:34.810]or slightly after planning, before the crop is harvested,
[00:15:39.960]when stuff is pollinating.
[00:15:43.230]So, there's our tendencies, okay?
[00:15:46.030]Now, let's take a look at soybeans.
[00:15:49.120]On soybeans, we looked at the November futures
[00:15:51.770]instead of the December futures like we would have on corn.
[00:15:55.560]And what you can see, we did the same thing.
[00:15:58.000]We looked at it and said from January
[00:16:00.290]all the way out through December and said
[00:16:02.737]"Okay, how does pre-harvest sales compare to harvest?"
[00:16:06.990]And just like what we had on corn, 92% of the time,
[00:16:10.210]the high occurs before we get to October or November, okay?
[00:16:16.120]And then we came in and we said,
[00:16:17.567]"Now, what happens if we can put beans in the band?"
[00:16:20.560]Now here's where beans was a little bit different than corn.
[00:16:23.830]On corn, you know 88% of the time
[00:16:28.750]we're seeing pre-harvest highs happening
[00:16:32.820]compared to even the post-harvest side.
[00:16:35.690]Here, you'll notice our percentage is only 60%.
[00:16:38.990]So, what we're saying is that if you could store the grain,
[00:16:42.300]and we're going all the way January
[00:16:43.750]clear through that next harvest, 60% of the time,
[00:16:49.220]the high would occur pre-harvest,
[00:16:51.720]40% of the time is post-harvest.
[00:16:54.080]The biggest difference I would say between corn and soybeans
[00:16:57.670]is that on soybeans
[00:16:58.650]you have some additional weather problems
[00:17:01.110]that sometime can come in because of South America,
[00:17:04.170]and the fact that there's such a heavy amount of production
[00:17:06.630]down there that can sway the numbers.
[00:17:09.310]So, we've looked at when the tendencies
[00:17:11.220]of the higher prices are.
[00:17:13.260]Now, what we wanna do, though, is we wanna go in
[00:17:16.230]and we wanna look at how do we physically take action?
[00:17:20.450]What are our tools in our marketing toolbox
[00:17:24.270]to be able to get sales made?
[00:17:26.350]And what I've listed out for you here
[00:17:28.150]is the five most common grain contracts
[00:17:31.260]that could be used:
[00:17:32.700]forward cash contract, storage contract,
[00:17:36.010]delayed pricing contract, a basis contract,
[00:17:39.890]and a hedge-to-arrive contract
[00:17:41.790]that depending on who you're doing it with is called an NBE,
[00:17:45.480]a futures first or is a hedge-to-arrive contract.
[00:17:49.820]So, let's take a look
[00:17:50.959]at when should these different contracts be used?
[00:17:55.400]'Cause what we're talking about here is we're talking
[00:17:58.260]about separating the whole decision upon selling
[00:18:02.930]and getting it broke down to not being focused
[00:18:05.430]on your cash price, but we're getting it broke down
[00:18:08.520]so that we're focusing on when is the optimal time
[00:18:12.090]from the futures price?
[00:18:13.630]And then when is the optimal time to set the basis?
[00:18:17.180]So, probably the best way to look at this
[00:18:19.920]is I set up four different quadrants here.
[00:18:23.260]In the upper right-hand quadrant,
[00:18:24.840]what we're gonna be looking at first
[00:18:27.420]is if we think the futures price is gonna go higher
[00:18:31.200]and we think the basis is gonna improve,
[00:18:33.700]what contracts should we use?
[00:18:36.000]Well, first thing we'd talk about
[00:18:37.740]is that you should just leave it in storage,
[00:18:39.870]and whether that's storage on farm
[00:18:43.550]or storage at the elevator.
[00:18:45.750]That's what you'd wanna do.
[00:18:47.300]The next thing you'd look at doing would be delayed pricing,
[00:18:50.540]which basically allows you to take your bushels into town.
[00:18:54.920]And if they're in town, you pay a service charge
[00:18:58.620]and you get the right to price those bushels later.
[00:19:02.070]So, we've looked at storage and delayed pricing.
[00:19:06.400]But now what happens if we think the futures price
[00:19:09.610]is gonna go higher, but we think the basis is gonna weaken?
[00:19:13.550]Or to say it another way,
[00:19:14.670]we think it's gonna become less positive, okay?
[00:19:18.220]Or it's gonna become more negative.
[00:19:20.540]What should we do? What action should we take?
[00:19:23.150]Well, in that case, what we should do
[00:19:24.730]is that we should use a basis contract.
[00:19:27.220]A basis contract is a contract we use
[00:19:29.890]with our local cash buyer.
[00:19:31.820]What we're doing is that we're calling him up on the phone,
[00:19:35.040]he or she, and we'll say we'd like the basis
[00:19:38.150]either for bushels that we have in the elevator in storage.
[00:19:41.630]We can set the basis on them and stop storage.
[00:19:44.680]Or it could be for bushels that we haul in today.
[00:19:47.540]We put them on a basis contract,
[00:19:49.830]and that gives us a period of time
[00:19:51.440]in which there'll be no storage charges,
[00:19:53.960]and we can still get a better futures price.
[00:19:56.930]Or it could be that we look out into the future,
[00:19:59.240]maybe we've got bushels in the band,
[00:20:01.380]and we look out to January, February, or March,
[00:20:04.270]if we see a basis we like,
[00:20:05.870]we could physically do a basis contract.
[00:20:08.340]And by doing that basis contract,
[00:20:10.300]then we can have that locked in and then we can deliver
[00:20:13.840]those bushels at a later time.
[00:20:16.185]So, there's different timeframes
[00:20:17.640]that delivery can be associated with a basis contract.
[00:20:21.870]But what if we're looking at a situation
[00:20:23.920]where we think the basis is gonna improve
[00:20:26.780]and the futures are actually gonna go lower?
[00:20:29.340]Okay?
[00:20:30.460]And in that case, what we'd look at is we'd look
[00:20:32.790]at a hedge-to-arrive contract.
[00:20:35.350]A hedge-to-arrive contract is a cash contract
[00:20:38.270]that you end up doing with your local grain buyer.
[00:20:41.840]What it does is it sets the futures price,
[00:20:45.670]but it leaves the basis open.
[00:20:47.960]Now, the one downside of the hedge-to-arrive though,
[00:20:51.420]is that once you deliver the bushels to the elevator,
[00:20:54.570]you are gonna have to go ahead and set the basis.
[00:20:57.460]Very few elevators will let you have bushels on storage,
[00:21:02.040]then set the futures price on it,
[00:21:05.230]and then set the basis later.
[00:21:06.740]It just doesn't work that way.
[00:21:08.690]But in a situation where we think
[00:21:10.380]the basis is gonna improve, but the futures is gonna go down
[00:21:13.400]hedge-to-arrive is a very good contract to use.
[00:21:18.830]Now, if we think the futures are gonna go lower
[00:21:21.270]and the basis is gonna weaken,
[00:21:23.200]then that's a perfect example to use
[00:21:25.010]a forward cash contract.
[00:21:27.020]Now, we could have used a forward cash contract also up here
[00:21:31.000]on this hedge-to-arrive window here,
[00:21:33.580]where we thought that futures were gonna go lower,
[00:21:36.550]but the basis was gonna improve.
[00:21:38.600]But if we would have used a forward cash contract there,
[00:21:41.810]we would have missed out on that basis improvement.
[00:21:44.540]How much basis improvement?
[00:21:46.473]A lot of times on corn, you might miss out
[00:21:49.060]of 10 to 15 cents a bushel.
[00:21:51.570]In years where you've got maybe tight supplies,
[00:21:54.500]it could be 25, 30 cents a bushel.
[00:21:57.920]And we do see even more than that happen on soybeans.
[00:22:00.830]So, it is important, I think, to make your selling decision
[00:22:04.610]not based off of the cash price,
[00:22:07.430]but you should make it based off of is this the best time
[00:22:11.580]on the futures price?
[00:22:12.970]Is this the best time on the basis?
[00:22:15.290]So, that gives you an idea of some of the different tools
[00:22:17.690]that are in our marketing toolbox.
[00:22:21.520]Now, what I wanna do though,
[00:22:22.880]is I wanna walk through and kind of show some examples
[00:22:27.230]of how actually the mechanics
[00:22:30.270]of these different contracts work.
[00:22:32.510]And so, first, we start off this forward cash contract.
[00:22:35.950]Now, this forward cash contract, what it's doing
[00:22:39.230]is that it's saying we're locking in a price
[00:22:42.640]for delivery sometime in the future,
[00:22:45.050]and the price we're locking in is the cash price,
[00:22:48.100]which means we're locking in and setting the futures price,
[00:22:51.910]and we're also setting the basis.
[00:22:53.990]So, let's look at an example.
[00:22:55.930]So, let's say it's April 17th.
[00:22:58.670]We call it our local elevator.
[00:23:00.340]At that time, the futures price is 4.15, the basis is a -30.
[00:23:05.810]And that would get...
[00:23:06.643]If we add those two together, that would then end up
[00:23:09.940]giving us a cash price of $3.85.
[00:23:13.960]We like that cash price. We lock it in.
[00:23:16.720]We tell the buyer we're gonna do that
[00:23:18.810]for delivery sometime in the future.
[00:23:21.220]And now we get out to harvest time,
[00:23:23.100]and what has happened is that the futures
[00:23:25.790]have went from 4.15 on down to $4.
[00:23:29.480]Basis stayed the same.
[00:23:30.820]But if we add those together, we can physically see
[00:23:33.880]that we've got a cash price of now $3.70.
[00:23:38.600]So, which price do we get?
[00:23:40.750]Do we get the 3.85 right here?
[00:23:44.910]Or do we end up getting the 3.70? Okay?
[00:23:49.090]Well, what price we get is that we committed to $3.85
[00:23:54.260]when we physically told the grain buyer
[00:23:56.640]we wanted to do a forward cashed contract.
[00:23:59.270]So, now let's take a look at our next contract.
[00:24:03.480]Next contract's a basis contract.
[00:24:05.650]We talked about basis contract.
[00:24:08.560]We would physically use that at a time when we think
[00:24:11.160]the basis is gonna weaken,
[00:24:12.930]but yet we think the futures price is gonna go higher.
[00:24:15.430]So, let's look at an example.
[00:24:17.350]Same price examples we had before.
[00:24:20.060]We have 4.15 futures. We add a -30 basis.
[00:24:26.050]And we can see that that gives us a 3.85 cash price.
[00:24:29.840]But unlike the forward contract, we don't lock in the 3.85.
[00:24:34.740]What we're actually doing is that we're just locking in
[00:24:37.930]the -30 basis.
[00:24:40.280]Time goes forward. We're now out to harvest.
[00:24:43.790]Futures price went from 4.15 down to $4.
[00:24:47.400]The basis went from a -30 to a -40.
[00:24:51.100]And as a result, the cash price is 3.60.
[00:24:54.250]Now, what price do we get?
[00:24:56.090]Now, this is a little bit more complicated
[00:24:58.210]than the forward cash because what we're dealing with here
[00:25:02.510]is we have to look at what do we have locked in?
[00:25:05.160]We have our basis locked in.
[00:25:07.090]We didn't have our futures price locked in.
[00:25:09.790]So, what we've got is we got the $4 comes from here,
[00:25:14.230]and the 30 cents comes over here from the basis side.
[00:25:18.840]So, we would have ended up getting...
[00:25:21.510]Right now, we'd have got $3.70,
[00:25:25.290]which would have been better than the 3.60
[00:25:28.580]that we got here, but it was below the 3.85,
[00:25:32.850]but the reason it was below the 3.85
[00:25:35.610]was because ultimately we didn't lock in our futures price.
[00:25:40.130]Now, let's take a look at a hedge-to-arrive example.
[00:25:43.590]Hedge-to-arrive, we said we'd use that contract
[00:25:46.540]when we think the futures price is gonna get weaker,
[00:25:49.610]but the basis is gonna improve.
[00:25:52.000]Back to our same example, 4.15 futures, a -30 basis
[00:25:56.770]gives us a 3.85 cash.
[00:25:59.110]In this example, we don't lock in the cash price.
[00:26:03.750]We don't lock in the basis.
[00:26:06.760]But we do like the futures price,
[00:26:08.510]so we go ahead and we lock in that futures price.
[00:26:11.920]Time goes forward. We now get out to harvest.
[00:26:14.880]And what's happened?
[00:26:16.340]Futures price went from 4.15 down to 3.50,
[00:26:19.880]basis went from a -30 to a -20, cash price is now 3.30.
[00:26:26.500]What do we get for a price for our bushels?
[00:26:29.660]Well, we locked in the $4.15 that came from back here.
[00:26:35.750]We hadn't locked in the basis.
[00:26:37.480]The basis got smaller, got narrower.
[00:26:40.330]It improved, went to a -20.
[00:26:42.970]We then locked in that at our time of delivery.
[00:26:46.510]So, we ended up getting $3.95 for our bushels
[00:26:51.550]because we took two steps.
[00:26:53.710]Better than the 3.30 because we committed to our sale
[00:26:57.330]back here in April.
[00:26:58.690]Also, better than the 3.85 that it started out with
[00:27:02.250]because the basis did improve.
[00:27:04.680]So, that gives you a few examples of just seeing
[00:27:07.500]how different situations work with the hedge-to-arrive,
[00:27:10.160]the basis contract, and also the forward cash contract.
[00:27:15.540]Now, one additional thing we wanna spend
[00:27:19.100]our remaining time talking about,
[00:27:20.700]and it gets back to this fear
[00:27:22.910]of the market price going higher
[00:27:25.961]and how that can keep us from making sales.
[00:27:28.730]And what we're talking about here is what do you do
[00:27:31.030]if you sold your grain and now prices go higher?
[00:27:34.700]Okay? It's that fear of missing out.
[00:27:37.760]So, if we look at this here,
[00:27:40.470]we can actually come in and buy a call
[00:27:42.980]against the bushels that you sold.
[00:27:45.100]Now, today, we're not gonna get deep into what that call is,
[00:27:48.020]but I want you to think about the call this way.
[00:27:50.800]A call increases in value if the market goes higher.
[00:27:55.190]A call is actually an option on a futures contract, okay?
[00:28:00.580]So, it is tied to the futures market.
[00:28:03.200]It's an option on one of those futures.
[00:28:05.460]Increases in value if the market goes higher.
[00:28:08.230]You pay a premium to buy it.
[00:28:10.580]You buy it and then you can later sell it.
[00:28:13.470]You can do this through a brokerage account
[00:28:16.040]that you have with your broker,
[00:28:17.990]or you can with, I would say, 85 or 90%
[00:28:21.640]of your cash grain elevators,
[00:28:23.220]the people who buy your bushels,
[00:28:25.930]you can work with them to actually add a call
[00:28:29.150]to a previous sale that you've made.
[00:28:32.220]You don't have to buy a call
[00:28:33.860]at the time that you sell those bushels.
[00:28:36.200]You can step in and buy a call at any time
[00:28:39.380]during the period of time
[00:28:42.060]that you are looking at the market and what it may do.
[00:28:46.150]Now, let's work through some examples here.
[00:28:49.200]What I've laid out for you is I've got two moments in time.
[00:28:52.740]We look at this here is April,
[00:28:55.040]and then we evaluate here again in November.
[00:28:57.940]And what we're doing is we're saying
[00:28:59.380]we're using this forward cash contract,
[00:29:01.870]that one that locks in the cash price.
[00:29:04.660]And when we made that sale originally,
[00:29:07.630]we said the futures price...
[00:29:09.010]And I've just put the symbol in there
[00:29:10.470]to get you used to that.
[00:29:11.570]That's the symbol right here for December futures, CZ20.
[00:29:16.000]The Z is December, C is corn, 20 is the year,
[00:29:21.320]so that's December of 2020 futures.
[00:29:24.510]We've got the same basis we're used to at a -50.
[00:29:28.290]And those both come together to give us
[00:29:30.210]a cash price of 3.50.
[00:29:32.430]We looked at that 3.50. We said that was a good price.
[00:29:35.890]We locked that price in.
[00:29:38.010]Now, for sake of this example and simplicity of it,
[00:29:41.307]I said at that same time you physically came in here
[00:29:44.820]and bought a December 2020 $4 call.
[00:29:49.650]Now, I wouldn't worry too much about that $4
[00:29:53.270]and understanding what that is.
[00:29:54.700]That's the $4, what's called a strike price.
[00:29:58.040]Think of it just like insurance.
[00:29:59.790]And that's what a call option is.
[00:30:01.220]It's kind of like insurance against a market going higher.
[00:30:04.990]That $4 just represents a level of coverage.
[00:30:09.110]And as a result, basically, it lets you have an idea
[00:30:13.360]of how much will the value of that option increase
[00:30:17.110]when the market goes up?
[00:30:18.700]You also pay a premium.
[00:30:20.470]Don't get too hung up on the fact that I put in 30 cents.
[00:30:23.940]I just used 30 cents as an example.
[00:30:26.540]So, in this example, you'd have bought a $4 call
[00:30:29.170]for 30 cents a bushel.
[00:30:31.360]The market then will evaluate the next moment in time,
[00:30:34.320]which is November 20th.
[00:30:36.100]So, we go from...
[00:30:37.630]Market goes from $4 on up to 4.50.
[00:30:40.800]What happens to the value of our option?
[00:30:43.700]Well, the value of the option increases in value
[00:30:46.630]'cause the market went higher.
[00:30:48.300]Now, when we physically get up to 4.50,
[00:30:50.580]that option is worth 50 cents.
[00:30:53.140]How much did we pay for it originally?
[00:30:55.500]We bought it for 30 on the 20th.
[00:30:58.880]We sell it at 50 because we think the market's got
[00:31:01.820]as high as it will go.
[00:31:03.350]We ended up making 20 cents a bushel.
[00:31:06.820]Now, let me talk about a few misconceptions on an option.
[00:31:12.210]Some of the most common ones we'll hear
[00:31:14.010]is that, well, I have to see the market go up
[00:31:16.760]a minimum of 30 cents if I pay 30 for it
[00:31:20.730]in order for me to make any money.
[00:31:22.410]And that's not true. I'll give you an example.
[00:31:25.120]If you bought this on April 11th and three days later,
[00:31:29.240]the market hadn't changed
[00:31:31.150]and you decided you wanted to sell it back,
[00:31:33.710]it'd still probably be worth about that 30 cents.
[00:31:36.400]So, it's got an actual value.
[00:31:38.660]You also can step in and sell it back at any time.
[00:31:43.030]If you bought it on 4.11 at 9:30 in the morning,
[00:31:47.680]at 9:31, you could physically sell that back.
[00:31:51.440]How would you do that?
[00:31:53.410]If you're working with your broker,
[00:31:55.190]you'd physically make a phone call to your broker
[00:31:57.440]and tell him to sell it.
[00:31:58.780]If you're working with your local grain elevator,
[00:32:01.600]and that's where you put the option
[00:32:03.480]against your sold cash sale, you'd call them
[00:32:06.540]and just tell them to sell it
[00:32:08.170]and they would get you out of it.
[00:32:09.850]But anyway, in this case, it's worth 20 cents a bushel.
[00:32:13.410]So, now we've got a few calculations.
[00:32:15.510]Once we start using options
[00:32:17.610]in conjunction with previous sales
[00:32:19.610]that we've gotta get comfortable with,
[00:32:21.570]the first one is a minimum selling price, okay?
[00:32:25.830]The minimum selling price, what that means
[00:32:28.460]is regardless of what the market does,
[00:32:31.900]it's gonna tell you what price you're gonna get
[00:32:34.820]for your grain.
[00:32:36.060]Now, how do we calculate that?
[00:32:37.840]Well, we take the futures price, the $4,
[00:32:40.910]we subtract off the premium of the option, the 30 cents,
[00:32:44.750]and then we add the basis, which is 50 here.
[00:32:47.140]And that gives us our minimum selling price.
[00:32:49.700]So, if the market went down after we bought it,
[00:32:52.550]the most that we could lose is that 30 cents,
[00:32:55.480]what we paid for that option.
[00:32:56.850]If that option went to zero value,
[00:32:59.210]in that case, we would know we'd get $3.20.
[00:33:04.000]And this is what appeals to some people,
[00:33:06.760]maybe not at the $3.20 level,
[00:33:09.670]but what appeals to them is the fact
[00:33:11.580]that you can make a cash sale.
[00:33:14.200]You could still have the ability to get a better price
[00:33:16.700]if the market went higher,
[00:33:18.440]but yet, if the market went lower,
[00:33:20.040]you would know your floor.
[00:33:21.810]You'd know what the lowest price you could receive
[00:33:23.950]for your bushels.
[00:33:25.440]And that gives some people confidence
[00:33:27.300]to be able to make the sale.
[00:33:29.300]The next thing we have to figure out is that in this case
[00:33:32.810]where we did make money on the option,
[00:33:34.660]what's our actual selling price for our bushels?
[00:33:38.240]Well, how we calculate that is we calculate that
[00:33:40.750]by looking at what cash price did we receive?
[00:33:43.970]Well, back here on April 11th,
[00:33:45.660]we locked in this $3.50 on a forward cash contract.
[00:33:51.140]And then we bought the call.
[00:33:53.730]We sold the call, we made 20 cents.
[00:33:56.370]So, the price that we ended up getting is 3.50 from up here,
[00:34:01.940]20 cents in profit on our call,
[00:34:05.730]and that ended up giving us $3.70,
[00:34:09.400]better than the 3.50, but not as good as the $4.
[00:34:13.790]So, this is one way if you make sales
[00:34:15.717]and you're not quite sure that the market's gonna go higher,
[00:34:19.100]you can still give yourself some upside by buying this call.
[00:34:22.370]Or what you can do is that you might be able
[00:34:25.800]to make a sale earlier.
[00:34:27.980]Prices look good, just kind of like what we had this year.
[00:34:31.380]Prices then go down, but then it turns hot and dry.
[00:34:35.010]And you can have the confidence to know
[00:34:37.060]that you can step back in at any time,
[00:34:39.630]add a call to that sale,
[00:34:41.340]and still be able to improve your price.
[00:34:44.300]But what happens if instead of the market going higher,
[00:34:47.460]the market actually goes lower.
[00:34:50.496]And this example,
[00:34:51.329]it's set up exactly as what the previous one was.
[00:34:54.730]We still came in and bought this $4 call at 30 cents.
[00:34:58.650]So, we give out the $4 call at 30.
[00:35:02.580]Unfortunately, the market went from $4 on down to 3.50.
[00:35:06.680]Now, we did a forward cash contract,
[00:35:09.200]so we got our 3.50 locked in,
[00:35:11.980]but then the market did go down to 3.50
[00:35:14.400]by the time we got out here to November.
[00:35:17.470]Now, instead of that option being worth 50 cents,
[00:35:20.130]like it was when the market went to 4 to 4.50,
[00:35:23.320]when we go from 4 on down to 3.50,
[00:35:26.140]unfortunately that option's now worth zero.
[00:35:29.310]Now, we could have on any time in there...
[00:35:32.160]After we bought it, we could have sold it back.
[00:35:34.520]And maybe we sold it back,
[00:35:35.890]and we saw that it looked like there was rains coming in
[00:35:39.229]and the price was gonna go lower.
[00:35:41.020]We wouldn't have to automatically lose that full 30.
[00:35:44.170]We could have sold it back at any time in there
[00:35:47.110]and tried to recoup some of the money we'd spent on it.
[00:35:50.130]So, in this example here, we ended up losing
[00:35:53.180]the full amount of premium,
[00:35:54.690]what we paid for the option, the 30 cents.
[00:35:57.570]Now, how does our minimum selling price calculate out?
[00:36:00.980]Well, it's the same formulas that we had
[00:36:03.160]in the previous slide.
[00:36:04.780]It's gonna physically calculate out
[00:36:06.530]just like our previous example,
[00:36:08.647]$4 futures, -30 on the call premium,
[00:36:13.640]we then have our basis in here of -50.
[00:36:17.480]That gives us a floor of $3.20.
[00:36:20.720]What price did we actually end up getting for our bushels?
[00:36:24.180]We sold at 3.50, we lost 30 cents on the option,
[00:36:30.070]so we ended up getting 3.50 plus a -30.
[00:36:34.250]That gives us our $3.20.
[00:36:37.070]So, you can see we're right back to what our floor was,
[00:36:39.860]like what we had before.
[00:36:42.890]So, just kind of briefly reviewing.
[00:36:45.540]What we talked about is that initially we said,
[00:36:47.777]"Why does marketing matter?"
[00:36:49.670]Well, marketing matters because there's tendencies
[00:36:52.130]in which on both corn and soybeans,
[00:36:54.370]making those pre-harvest sales will give you better prices
[00:36:58.010]than making your post-harvest sales over 80% of the time.
[00:37:03.450]We also said, though, in order to be able
[00:37:05.120]to be comfortable doing that,
[00:37:07.490]we said that you're gonna need to get over two fears,
[00:37:10.400]that fear of not producing and we said
[00:37:12.510]you could have that confidence that your crop insurance
[00:37:16.300]was gonna be there to provide dollars
[00:37:19.070]for you to buy back those bushels if you don't produce them.
[00:37:22.143]Then we also talked about that fear of missing out
[00:37:24.750]on higher prices or a better basis.
[00:37:27.610]And what we covered there, we talked about the tendency
[00:37:31.110]of knowing when the higher prices are,
[00:37:32.750]so those pre-harvest sales gives you the higher potential
[00:37:37.520]of getting a better price.
[00:37:39.300]We also talked
[00:37:40.160]about some of the different marketing alternatives
[00:37:42.800]that would allow you to manage the basis
[00:37:45.460]through the different types of contracts,
[00:37:47.680]whether you're doing a hedge-to-arrive
[00:37:49.610]just to set the futures price,
[00:37:51.680]or you're just doing a basis contract to set the basis
[00:37:55.440]and wait for the futures to go up
[00:37:58.220]or in the case of the hedge-to-arrive,
[00:38:00.800]to wait for the basis to improve.
[00:38:03.070]But then we also said that what you could do
[00:38:05.550]is you could step in and add a call to your previous sale
[00:38:09.240]that you made to give you a better price
[00:38:11.670]if the market went higher.
[00:38:13.200]And you could do that at the same time
[00:38:15.170]that you physically sold those bushels
[00:38:17.660]through a broker or through your local cash market.
[00:38:20.830]Or you could make a sale, and if the market went higher
[00:38:23.370]and then it turned out hot and dry,
[00:38:25.840]you could then come back in and buy a call
[00:38:28.360]to still have the confidence to know
[00:38:30.720]that you could get a better price,
[00:38:32.480]and that would give you the confidence to make a sale.
[00:38:35.820]So, this gives us an idea of why that marketing matters,
[00:38:39.340]how to overcome those fears.
[00:38:41.280]Thanks a lot for joining us,
[00:38:43.320]and look forward to future conversations with you.

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Jeff Peterson - First Steps in Marketing

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