Agriculture is a seasonal business. Planting season. Harvest season. Bookwork season. Meeting season. Marketing season.
No, strike that last one. Marketing is a year-long process, and good farm marketers will look ahead even more than one crop year to begin their marketing.
When ethanol fueled the 2007 launch of high commodity prices, marketing was put on the back burner. Less time was spent because every sale was profitable.Young farmers starting their career in from 2007 through the drought year of 2012 only saw prices well above breakeven levels. Ag economists, who touted the “new price era,” convinced farmers that prices were at a new level that was well above the point of breaking even.
That isn't the case anymore. Soybean prices have been above breakeven for most farmers, thanks to China’s voracious appetite and the El Nino drought in Southeast Asia that pushed up prices for palm and other vegetable oils, including soybean oil. Beans have now come well off their early December highs by 75 cents per bushel and are trading below the psychologically important $10 mark.
A cadre of marketing specialists project soybean prices in the $8 range in the not-too-distant future, which means they would be under breakeven levels for most farmers.
Since the agricultural economy has cut farm income in half over the past three years, many farmers have used up their working capital and see equity eroding further as debt piles up. Many are making visits to lenders for the first time in years, and the first time ever for some. Farm loan officers at commercial banks, and their counterparts at Farm Credit, aren't only willing to loan less and demanding more collateral, but are asking hard questions about a farmer’s marketing plan for 2016 crops and what will be raised in 2017.
Uh, marketing plan? Sell at the highest price? Is that what you mean?
Not really. A marketing plan needs to be well thought-out, written and implemented at trigger points, not by seat-of-the-pants decision-making. One needs to know the exact cost of production, so a breakeven price is known and sales can be based on profitability.
Family cost of living has to be included. That not only includes monthly food and electric bills, but college tuition, nursing home expenses and the extraordinary high cost of health insurance.
To build a marketing plan, look at yield expectations, gauged from a 5-year average for a farm, and, the lender really likes to use the term “conservative.” Target dates for commodity sales or price points make it easier to pull the trigger on implementation. Knowing that highest prices frequently are in the spring, knowing the basis makes it easier to write a basis or hedge-to-arrive contract, and knowing the cost of carry makes forward contracting more confident.
For farmers who feel lost in doing that, there is an information support group, of sorts, that meets monthly in Assumption, known as the Central Illinois Marketing Club. It has been around for a few years, but is renovating its purpose beginning with the Jan. 17 meeting at 6:30 p.m., when the discussion will turn to calculating breakeven prices.
Leaders will distribute a simple electronic spreadsheet with typical numbers for a Central Illinois corn and soybean farm, which can be modified at home by attendees inserting their own numbers. A subsequent meeting on Feb. 7 will introduce details of a “mock farm” the group has created to demonstrate how various marketing plans will impact a farm budget and its revenue prospects. Monthly meetings are typically at 6:30 p.m. on the first Tuesday of the month at GSI’s Shuler Center.
While there are no guarantees of how a lender will react, it is the type of information that a lender wants to see a loan customer learning and implementing.
See you there.