Mike turns to Jason, “Now for the tough part. We need to list specific things we need to do — and when to do them.” After some debate they have their preliminary Action Plan:
- Review all open farm purchases. Then talk with the farmers about crop insurance coverage — that indemnity can help offset the cost of canceling contracts.
- Meet with the banker; she needs to know our game plan. Run “what if” scenarios and identify dollar needs if corn should go to $10 or soybeans to $20. Remember that futures Initial Margins will also likely rise.
- Put in “good until canceled” orders to set corn and soybean carries at reasonable objectives — just in case. Otherwise hedges stay in Dec corn and Nov soybeans — for now.
- New-crop export soybean basis is near record highs. Look to make some harvest sales to reduce overall basis risk.
- Widen our new-crop bids/margins. Calculate how much corn and soybeans we can ship by December 1. Anything we buy over that has to be priced to allow for the cost of the inverse(s) plus interest past December. Don’t raise bids to “chase” bushels at this point!
- Check on buying Dec12/July 13 corn “Calendar Spread Options.” Buying puts would give us a way to gain if the inverse worsens while our short hedges are in Dec12 futures.
- Be careful about forward sales over extended periods to any single buyer. The ethanol and livestock sectors will be going through some lean months and accounts receivable could become an issue for us.
- Work on how we’ll fill our space. Jason can estimate local production and “market share.” Consider very cheap DP, or even free delayed pricing. We’ll get title and the farmer can price the grain later. If farmers are still bullish at harvest, this could be attractive to them.
- Review discount schedules. “% of price” schedules can get very expensive.
- DO NOT buy forward year grain against 2012 crop year futures. That bankrupted a lot of farmers and some elevators in 1996. Research the history for Jason to read.
Mike closes the office door and turns to Jason, “We don’t know yet what we’ll face, or how small the crops may be. But we’ll get through this. We will have to work a little harder and think a little more. Today’s Action Plan is our starting point, not the end game. Remember Granddad’s words: “Don’t panic; learn to respect market signals.” We can earn storage revenue, or if farmers are heavy sellers at harvest then basis should break back or futures carries should return. Somebody will have to be paid to hold grain the market doesn’t need at harvest. If farmers don’t sell and basis skyrockets at harvest, we can consider selling DP inventory and buying it later. Just fasten your seat belt, Jason; this is a year you’ll never forget.”
Diana Klemme is a longtime contributor to Feed & Grain. Contact her at Grain Service Corporation, Atlanta, GA, by calling (800) 845-7103 or e-mail at firstname.lastname@example.org.