• Your Personal Grain Merchandiser

How To Define “Good” Grain Prices

corn farm

That might sound like an obvious question, but we contract grain with commercial Corn and Soybean Farmers all over the country and not everyone evaluates their crop’s price performance the same way… sometimes the answer changes depending on the day!

We’ve rounded up a few of the different ways Farmers judge the price of any of their grain sales, whether a cash sale, Hedge to Arrive “HTA”, basis contract, average price contract, managed cash grain program, accumulator, or any other grain Pricing Tool. This is a guide to evaluating grain price performance from a number of different perspectives.

Individual “Break-Even”:

            This number is often thought of as a per-bushel price that we have to sell our grain above to make a profit. Seems simple enough, but let’s look at why it’s more complicated than it looks.

When you add up input fertilizer costs, machinery maintenance, interest on loans, payroll, etc., there is an ultimate cost of production for running your farm. But that number can be difficult to determine without organized record keeping and accurate accounting for interest payments and missed-opportunity costs. 

            Beyond adding up costs, yield must also be considered, which is why determining a break-even is difficult to do until we’ve sold all of our grain. Let’s assume the total yearly cost of running a Soybean operation is $1,000,000 and our 5 year Average Production History, aka “APH”, is 100,000 bushels. Common sense and simple math tell us we have to base our grain marketing plan around selling Soybeans for more than $10 per bushel.

          *More information on Cost of Production vs Break Evens in this article.

But what if hail damages 10% of the crop right before Harvest and we only produce 90,000 bushels? Even at a 10% reduction in yield, we see that same break-even rise to $11.11! Conversely, if Mother Nature cooperates beyond expectations and we yield 110,000 bushels, our break-even drops to $9.09. Now we see that a fairly standard yield variance of just 10% of our APH creates a $2.02 swing in per-bushel performance.

Contract High:

            Here we’re specifically looking at the absolute highest single price a particular grain futures contract ever reached. Because so many Farmers will sell at least some of their grain at Harvest, this is typically judged on the December Corn and November Futures contracts. If we’re solely making “cash” sales, then we’d have to execute a very timely sale (and have a lot of luck) to “hit the highs”. It’s nearly impossible to ever guess where or when this will be (or any other price milestone), so this is an unfair standard to hold yourself or your commodity broker to.

            We should note that when looking back at historical Corn and Soybean charts, we tend to see a “summer peak” for the expected new crop price around May, June, or July. This is because we’re running out of last year’s “old crop” and are still watching our “new crop” to understand how bountiful of a yield Harvest will be. Likewise, Corn and Soybean harvest contract lows tend to occur in October. However, every crop year is different and we can’t rely on this inexact seasonality when trying to guess a Contract High.

Contract Low:

            We all dread “The Lows” and want to avoid selling at rock bottom prices. Those who site the Contract Low as their benchmark to avoid typically just want to make sure they’re doing at least a little better than the worst price we’ll see in a year.

A good way to avoid the Contract Low would be our next type of price benchmark…

Contract Average:

            No matter how volatile a futures contract may have been, when we look at the length of the contract, we’ll have a trendline average of where prices were. This is a very common way for Farmers who make cash sales and forward contracts to assess how timely their sales were. They ask themselves, “Was I above or below the average price available to me?”
            Being “average” may seem unappealing to those of us who immediately look at contract highs, but consider that in a profitable year where grain prices are above one’s cost of production, it’s not so bad to incorporate a strategy that keeps you farming.

            That’s why so many elevators/ grain buyers offer some form of “Average Price Contract” where Farmers can select a date range to have an equal number of bushels priced every day or every week. The resulting total price will be the average for that time period. But as we’ve said, not everyone is satisfied with being just average…

The “Top Third”:

            Similar to the Contract Average, aiming for the “Top Third” means selling your crop in the top 33% of sale prices seen over the life of a futures contract. This is a bit more ambitious a target than contract averages and can’t solely be achieved by entering an Average Price Contract.

            It’s also not exclusive to one grain marketing strategy. Farmers of all grain marketing sophistication levels (from 100% cash sales at Harvest to those hedging and speculating with futures & options) look at the top of the market and try to beat the averages by a statistically significant amount. Getting there is the hard part…

Beginning Contract Price:

            We define this as the futures price of any commodity on the day a contract was entered into, or the first day that contract was available to the market (typically no more than 2 years out from delivery for grain commodities). It’s a milestone we can look at to understand where we started and base it off of where we’re going, like our next price perspective…

Final Contract Price:

            This is often the first price Farmers will check at the end of a pricing contract because it’s the most recent time stamp from getting a settlement check. What that looks like in reality is that we find out the final futures reference price of a cash grain program, for instance, and compare it to the current Chicago Board of Trade futures price on that last day.

            In a sense, that final day of pricing might as well be any other day during the life of the contract, because it has little to do with the specific contract strategy entered into in the first place! That’s why we must also assume we would have had the foresight to have otherwise priced all of our grain at that one particular point in time. This principle holds true for the Contract High as well, because we’re better served evaluating all our pricing decisions as a whole, not just on one pricing number or one sale.

Now we’re starting to see why we need to take different perspectives when evaluating price. Sometimes that perspective can be based on what we hear rather than what prices we see…

Public Consensus:

            This final perspective tends to be separated from the quantitative world of pricing and charts. It can come in the form of the talk we hear from friends and neighbors at the coffee shop. We need to balance listening to/ understanding what others are doing with staying our own course and not succumbing to chatter. We can always learn from someone else’s experience and perspective, but we need to also remember that everyone’s situation is a bit different. We also may not be getting the full picture to understand why someone was successful or not.

            In reality, we have to understand all these different factors to accurately assess how well we’re matching up true costs of production with our grain marketing plans. As we see, everyone can look at the same performance figures and draw different conclusions about price performance.

            Sometimes strategy and price perspective come down to factors unrelated to crop yields and what prices we got for them. Two similar sized farms on the same ground would probably approach their grain marketing differently if one had all their land owned and paid for with no bank debt, versus a neighbor renting all their land and managing heavy loan burdens just to stay in business.

That’s why diversity is so important in grain marketing, because it’s nearly impossible to “guess the highs” and getting the Contract Average every year just isn’t good enough if prices aren’t profitable. Keeping all this in perspective helps you evaluate past sales and create a strong, diversified grain marketing strategy for the future.

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