Using beneficial price strategies

Ray Mueller
Now Media Group


As growers and sellers of commodity grains face another year of relatively low market prices, commodity broker and market analyst Robin Schmahl of AgDairy LLC used his appearances at the Extension Service's grain crops production clinics to review some of the bygone pricing opportunities.

Schmahl, who is based at rural Elkhart Lake in Sheboygan County, described 2015 as 'an interesting and frustrating year' in the commodities markets. He noted, however, that what happened was 'not unusual' but agreed that many commodity grain sellers 'wish they could replay the year on marketing.'

Missed opportunities

Schmahl was referring to the differences between futures market prices that were once available for minimal contracts of 5,000 bushels of corn or soybeans and what the cash and nearby futures prices are for those commodities today.

For example, the December corn futures for the 2015 crop were as high as $5.04 per bushel in April of 2014 and $4.54 in early July of 2015 compared to current cash and March futures of close to $3.65 per bushel minus the local basis value, Schmahl said.

Similarly, the November 2015 futures for soybeans hit highs of $12.32 per bushel in May of 2014 and $10.45 in July of 2015 compared to prices running at just below $8.80 per bushel in the current cash market, Schmahl noted.

Marketing mindset

Those pricing opportunities are missed when growers are short-sighted and don't start marketing their crop until after they have harvested it, Schmahl stated. To give better protection to their bottom line, he urges farmers to 'take advantage of prices when they are there.'

But it's 'human nature to not do anything,' Schmahl observed. Farmers are taking advantage of the latest innovations in technology for producing their crops but aren't doing the same in many cases with marketing, he said.

At the moment, Schmahl doesn't expect much of a turnaround in commodity grain prices unless a major weather event severely curtails the projected 2016 crops in the United States and elsewhere. He cited record production, very high carryout volumes, and a cutback in exports to China as factors likely to keep 2016 prices lower than they were in 2015.

Other forces keeping prices low include the absence of fund buyers in the commodity grain markets when prices are low, the flattening of ethanol production and low crude oil prices, Schmahl said. He also cited the prospect of large crops of corn and soybeans being harvested in South America in the coming weeks and the increased tolerance for drought in the corn hybrids being grown in the United States.

Corn outlook for 2016

For the 2016 corn crop, Schmahl agrees with the estimate by the U.S. Department of Agriculture that about 80.5 million acres will be harvested for grain, resulting in an another crop of more than 13 billion bushels. Schmahl projects a per acre average yield of 165 bushels compared to the USDA's estimate of 168.4 bushels, but they agree on a potential carryout of 1.8 billion bushels at the end of August in 2017.

But the focus needs to be on the possibility of an average selling price of $3.45 per bushel on the 2016 corn crop, Schmahl emphasized. To protect a somewhat better price when the market offers it, he proposed a hedging strategy which involves buying a December 2016 put option at $3.80 per bushel and selling two call options at $4.40 per bushel, thereby resulting in even money on the contracts. Any cash outlay would be the service fee and additional margin coverage should the price top $4.40.

A variation on that strategy is to buy a put option at $3.80 for 25 cents per bushel and then sell futures starting at $4.20 and then again at any 8 to 10 cent per bushel price increase, Schmahl said. Whatever the strategy, he advised that it is important to do something.

2016 outlook for soybeans

With Brazil poised to harvest a record crop of soybeans, the uncertainty of purchases by China, the strong value of the US dollar and projected ending stocks of 440 million bushels from the 2015 United States crop compared to 190 million bushels from the 2014 crop, Schmahl also suggests there's a need to seek some price protection rather than counting on on-farm or elevator storage to serve as a marketing tool for better prices.

Based on AgDairy's forecast of 82 million acres of soybeans being harvested with an average per acre yield of 47 bushels, the potential crop of 3.854 billion bushels would earn an average selling price of $8.50 per bushel, Schmahl stated.

For a hedging strategy on soybeans, Schmahl listed choices such as buying put options at $8.80 per bushel on the November 2016 futures and selling put options at $8 for a net cost of 20 cents per bushel. Another strategy is to buy put options at $8.80 and sell one call option at $10 per bushel and then another at $11 for a net cost of 14 cents per bushel.

As a third possibility, Schmahl mentioned a scale up approach for selling soybean futures starting at $9.25 per bushel and then again on any further 20-cent increases.

Wheat market outlook

Schmahl reminded Wisconsin winter wheat growers that wheat is harvested during 11 months every year somewhere in the world. With a projected 2016 wheat harvest on 46 million acres with an average per acre yield of 44.5 bushels, the year's crop of more than 2 billion bushels will be struggling to hold an average price of $5 per bushel as a carryout of up to 990 million bushels looms, he remarked.

For hedge pricing, Schmahl suggested a futures contract at $5.15 at a premium cost of 35 cents per bushel and additional purchases at any 10-cent increases. He would sell call options on wheat if there are price bounces.

Related observations

Given the current pricing outlook for grain commodities, Schmahl observed that some relief might occur if farmers in the South plant more sorghum, milo, and cotton instead of corn. He also mentioned the possibility of growing specialty crops but noted that convenient marketing outlets are not always available for them.

Schmahl agreed with an attendee's observation that some grain acres might be placed into the Conservation Reserve Program because the per acre rental payments promise to be much better in 2016 than farmers could earn in many cases by cropping them.

To corn growers who might not have adequate volume or an interest in futures pricing, Schmahl suggested a partnership with neighboring dairy farmers looking to buy corn for silage or grain. The arrangement could provide the corn grower with manure.

With most growers having crop insurance, Schmahl stressed that they are assured of a certain level of income and should be comfortable with pursuing some forward pricing strategies. 'Be pro-active. Don't hold out for the highest price' but set and follow a strategy that promises to be profitable based on input costs, he advised.

Schmahl can be reached by phone at (877) 256-3253, by email to or at