Watching the market for rallies using forward contracts with crop insurance and, if comfortable, using options may allow producers to receive a better-than-average market price.
This may not be completely achievable this year, but would be one piece of the puzzle of turning negative returns into positive returns.
There is much more uncertainly among producers than I have seen in recent years. Crop prices are stagnant and most projections at average yields and current forward price offerings are negative.
Some producers are still waiting on financing for their operating loan.
To produce a profitable crop in 2016, producers will need to look at all facets of the production and marketing system to let small changes add up to turn negative margin to positive profit margins.
The results from the 2015 production season are one of carry forward losses or just barely breakeven. Then there is the uncertainty of what crop to plant when everything projects to be negative as in Table 1. Is there hope for profits this year? Is this a year producers would like to skip and come back the next year?
For starters, we all know we can’t skip 2016 and plan to farm in 2017 so we can eliminate that idea. How can producers turn negative returns into positive returns? It is going to take a combination of several factors such as better marketing, managing costs, and producing the maximum economical yields.
Take advantage of market rallies
It is doubtful that the market is going to provide a windfall in higher prices that will take away any deficits. There may be opportunities during the year to take advantage of market rallies to either price a portion of the crop or put in place a market strategy such as a put option. While there are different option strategies producers can use, most do involve going through a futures broker so an account would have to be set up.
The basic put option strategy is to buy a Put Option and then either sell before expiration or let expire worthless if there is no value. Put options increase in value when the market goes down from the strike price purchased. The cost for the option is a premium and that is paid upfront. Put options could be a good strategy to look at particularly on a market rally. Producers interested in options should have a good idea on how they work before putting in place.
While Extension can assist in providing education on options, the CME Group has some good resources. Producers relying strictly on forward pricing or harvest sales may want to consider their crop insurance coverage when forward pricing their crop. A producer with a 75 percent buy up crop insurance coverage may want to book a higher percentage of their crop than one with just CAT coverage. If a producer had a shortfall in production in their forward contracts, generally speaking there would also be a crop insurance indemnity payment. That payment could be used to offset the financial obligations of a contract shortfall.
Based on Table 1, to breakeven over stated costs, a producer would need to increase over the stated prices using the stated average yields the following: 7.6 cents a pound for cotton, $1.16 per bushel for soybeans, 22 cents a bushel for corn, 67 cents a bushel for milo, 75 cents a bushel for wheat, and 98 cents a bushel for double crop soybeans.
Chuck Danehower is a farm and financial management specialist with the University of Tennessee Extension. He can be reached at [email protected]