Making cents of forward contracting
BY TOM BUTTON
Mid-January, corn growers could lock in $3.90 per bushel for the 1998 harvest. By spring, the price had slumped to $3.35.It's as if drought, insects or weeds had robbed the typical crop of $70 per acre. The difference is, most growers protect their crops against pests and weather. Few protect themselves against price risk.
Ontario corn and soybean growers use forward contracts to sell a mere 13 to 15 per cent of the crop. They use options on less than five per cent.
Bob Huckle is an exception. Depending on basis levels, the cash cropper from Wardsville in the southwest corner of Middlesex county will pre-sell 90 to 100 per cent of the bushels he's guaranteed under his crop insurance program, and he'll use options on at least half.
"Marketing is all about taking advantage of opportunities," Huckle says. "With the combination of forward contracts and options, I try to make sure I don't miss out."
Ridgetown College economist Brian Doidge is probably the province's most quoted market expert, putting out a steady stream of radio and print reports, and his daily "What's Corn Worth?" e-mail, available through the Ontario Corn Producers Association.
By the start of planting, a grower following Doidge's advice this year would have forward contracted 40 per cent of the 1998 crop. Other years, with stronger new crop bids toward planting, Doidge recommends contracting even more. "If we're going to cover our positions up with options, I wouldn't be averse to forward contracting 60 per cent of my production - or even more if I have crop insurance," he says.
It's a truism that two-thirds of the crop is sold in the bottom third of the market. And it's ironic, market watchers say, that most growers cling to a system of cash sales off the combine and from storage - only about a quarter of growers end up with an overall price above market average.
Risks are even greater now that markets are more volatile than ever, thanks to tight supply/demand ratios and U.S. farm policies that have forced Washington to stop using its treasury to keep prices stable.
Doidge believes there isn't more pre-harvest marketing "because growers are concerned about production risks. Thing is, they don't understand how futures and options work."
Options are knocked as a waste of money. Indeed, costs vary depending on how far out the protection extends, and how high or low the strike price. Buying call options to take advantage of upward movement in corn and soybeans that are already priced on a forward contract may cost as little as 10 cents a bushel for part of the summer, or as much as 60 cents for a full year.
Huckle, however, says he keeps his eye on his net return. He doesn't have on-farmstorage and rarely stores at the elevator. He thinks that when growers focus on the cost of options, they should look hard at all the costs of storage, including interest.
In 1995, Huckle started pricing his corn crop at a $3.50 per bushel average on forward contract, but ended up rolling through three sets of options and cleared a net $5.11 per bushel. In 1996, he earned $4.40 per bushel after option costs, and in 1997 $3.90.
Options got a bad name a decade ago when elevators introduced them as minimum pricing contracts. Many had fine print restrictions on terms, including when they could be triggered.
Most growers are also still unsure of the basic terms, such as call options, allowing them to take advantage of a rising Chicago market, and put options, which could be used, for instance, to protect growers who sign basis contracts against the risk that Chicago will fall.
Huckle says he exercises nearly 50 per cent of the options he buys, even though he uses his DTN screen to study market fundamentals, follow crusher bids and track Chatham corn prices to pick market peaks.
Huckle also teaches courses on forward contracting and options through the Ontario Agricultural Training Institute
Some advisers recommend growers predict their per-bushel cost of production so they can see when prices are profitable. Huckle dismisses that approach. "The market doesn't care whether I make a profit," he says. "Some years I'd never be able to sell, other years I'd sell too low."
Instead, he prices through forward contracts to be sure he can meet his commitments, and uses options that will let him take advantage of any price rise.
"The hardest thing in farming is pulling the trigger on a sale,"
Huckle
adds. "With forward contracts and options, you put a lot less
pressure on
yourself."
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A market analyst's view
London-based market analyst John DePutter, a Farm & Country
columnist,
says that over the long term, growers who split their crop into
six to
eight chunks that they market from April of the planting year
through to
July or August the year after will get the best returns. That's
if they use
market intelligence to pick the right pricing opportunities for
each chunk.
DePutter says growers shouldn't look at options as profit spinners. Instead, options are a kind of insurance. And just as insurance companies aren't about to pay out in claims more than they expect to take in premiums, growers shouldn't expect to be paid more through options than, over the long haul, they pay for the price protection.
Even so, DePutter recommends options for growers with limited risk tolerance - those, for instance, who have expanded onto high-priced land and must be sure of meeting mortgage payments.
He suggests that options can help soothe the growers, making them
better
marketers: "If you know you have a price locked in, and that you
can still
benefit if the price runs up, it's a lot easier to sleep at
night." -Tom
Button
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Options and contracting advice
Some elevators are trying to help growers get comfortable with
options and
forward contracts. W.G. Thompsons, for instance, is offering to
sit down
with growers to draw up marketing plans. Typically, branch
managers will
recommend growers start with one or two option contracts, and
then the
elevator will help the grower track how the option performs.
"There's a feeling that the use of forward contracts and options is speculating, with all the negatives that that word implies," says Bob Simpson, manager of Thompsons' Blenheim elevator. "We sit down and try to explore whether these strategies can actually reduce exposure to speculation."
Thompsons grain marketer Ross Goldhawk agrees that forward contracts help ensure that new crop will come to its elevators. Goldhawk believes, however, that the company's self-interest is longer term. "We don't just sell fertilizer, we help farmers plan their fertilizer programs," Goldhawk explains. "In the same way, if we can help farmers with their marketing programs, we believe they'll be loyal to us."
Goldhawk says that while options may be insurance, they're more
likely to
be used than other kinds of policies. Growers wouldn't dream of
bringing
home a new combine without keeping it insured, he says. Yet they
may see no
need to insure their corn price: "But there's a lot more price
risk on a
crop every year than that your implement shed is going to burn
down." -Tom
Button
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Growers look south for cheaper sprays
By TOM BUTTON
Soybean growers may yet get clearance to drive south of the border to take advantage of any red hot herbicide deals they can find.The Ontario soybean board has asked Ottawa to add four soy herbicides to its own-use pesticide program. Under the program, growers could import the chemicals duty-free, providing they fill out forms and arrive at the border with a copy of the Canadian label for the products.
Growers would be restricted to importing the amount of herbicide that they would actually spray on their own crops.
But are U.S. sprays cheap enough to make the trip worthwhile?
The soybean board says it has no evidence the chemicals are cheaper in the U.S., says Tom Lassaline, Lambton county cash cropper and soybean board chairman.
But traditional herbicides are under tremendous pressure in the U.S. because of sales of Roundup Ready seed, estimated at 35 to as high as 50 per cent of the total American crop.
In Canada, seed supplies of Roundup Ready varieties are so tight there will only be about 150,000 acres planted in 1998, less than 10 per cent of the crop. As a result, the soy board says chemical prices north of the border are under less pressure.
The soy board is spending close to $10,000 on the plan, mostly for chemical analyses to prove herbicides that would be imported are essentially the same as herbicides already registered for spraying in Canada.
The board won't say which chemicals are involved. Assistant manager Susan Iler would only say the board chose a range of herbicides based partly on use pattern. The board also opted for chemicals that would target different companies.
Also unknown is whether the oks will come in time for growers to import sprays for this crop year. If approvals come through, however, Lassaline says the board may start tracking prices in the U.S. and notifying Ontario growers when it looks better to shop south of the border. "We would let them know, certainly," Lassaline says. "That's part of our job."
If there are good deals, it would buck the trend of recent years. Ridgetown College economist Ken McEwan has been tracking cash and carry prices in Ontario compared to Michigan, Ohio and Illinois through the 1990s.
Last year, McEwan found that, in Canadian funds, a 3.3-litre jug
of
Pursuit cost an average $682.12 in Canada compared to $827.51 in
the U.S.
Pinnacle was $26.53 per eight-gram pouch compared to $41.73 in
the U.S.
Basagran, however, was more expensive in Canada, at $244.61 per
nine-litre
jug compared to $229.13 south of the border.
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SEEDBED
By Keith Reid
Plant by seedbed, not calendar
With every day that passes, farmers are under more pressure to assume that the soil is fit for planting. You tell yourself that while conditions may not be ideal, waiting for ideal means you'll never get the crop in, and by delaying it'll cost more bushels than you stand to lose from today's compromise planting.Seed, however, doesn't know how to read the calendar. It can only read the seedbed.
The ideal environment for seed germination is warm and moist - but not wet - and spacious enough to allow the shoot and roots to grow through the soil. Whether the field is plowed or no-till, the challenge is to create this environment.
Monitoring moisture
Crop stands would be much more consistent if farmers planted each
year as
if it were a dry year. Rainfall after planting can make up for a
shoddy
planting job, but you can't count on rain.
Most years, the moisture needed for seed germination comes up from below, not down from clouds. Capillary movement brings moisture up from the soil, and it occurs best in continuous small pores, not cloddy seedbeds. A seedbed that is too loose and fluffy will also prevent capillary movement, so sometimes a little compaction is a good thing.
Of course, adequate moisture is of no use if the seed dries out from exposure to the air. The seed opener should never smear the sides of the seed trench. Also watch the press wheels: They crumble the soil around the seed. If the soil around the seed appears plastic instead of crumbly, get out of the field and come back later.
Too much moisture is detrimental to seed germination as well; it displaces air from the soil. The seed is a living organism that requires oxygen for growth.
Soil resistance
After germination, the shoot and the root must be able to grow
outwards
through the soil. This implies a balance between having the soil
firm
enough for capillary movement of water, but not so firm that crop
growth is
restricted. The two most common problems with growth restriction
are
crusting of the soil surface and smeared soils preventing root
growth
outside the seed opener slot.
Crusting occurs when heavy rainfall is followed by rapid drying. The risk of crusting increases with the amount of silt and clay, but it's really a symptom of low organic matter. Reducing tillage, leaving more surface residue, improving rotations and adding organic material will reduce the risk of crusting.
Rotary hoeing or harrowing can help to break a crust, but it is a bandage, not a cure.
If the roots are confined to the seed opener slot - and this happens especially if the soil is too wet at planting - that plant is never going to grow or yield properly. There is no treatment after the fact: The only thing to do is learn your lesson and, next year, wait until the soil is dry before planting.
Creating warmth
Fighting against a short season, farmers can help ensure that the
ground
warms up as quickly as possible. In reduced-till fields, this
means moving
crop residue away from the row, or incorporating it into the
ground to let
the sunlight get at the bare soil.
Depth of planting also has a profound effect on seed warmth.
Early in the
season, soil temperature drops quickly with increasing depth.
Keeping the
seed relatively shallow can speed germination significantly.
Keith Reid is soil fertility specialist for OMAFRA at Walkerton
(kreid@wcl.on.ca)
back to May 4, 1998 Issue
Spare the plow, spoil the worm
BY TOM BUTTON
Many no-tillers like to plow their fields every four to six years to help spread organic matter and fertilizer through the soil profile.This is the time of year, however, when growers can start seeing the price they pay for not leaving the plow in the barn. Evidence shows that plowing no-till soils is deadly for earthworms.
That's a loss, says Cathy Fox, soil fauna scientist for the federal agriculture department at London, because in no-till fields, earthworms are crucial for the vertical movement of air, water, nutrients and organic matter. Earthworms also play a major role in improving the stability of soil aggregates in no-till soils, making them more resistant to erosion and crusting.
Fox counted earthworms last year in long-term tillage plots on Brookston clay loam at Woodslee. (See Earthworms vs. the Plow). In plots that had been no-tilled since 1983, she found an average 170 earthworms per square metre. In plots that had been no-tilled until 1996 and then were fall plowed and spring disked, there were only 22 earthworms per square metre.
Almost 90 per cent of the earthworm population vanished because of the single year's plowing after 13 years of no-till. Indeed, the earthworm population dropped nearly as low as in plots that had been plowed every year since 1983.
Encouraging, however, is that when the long-term plowed soils were put into their first year of no-till, the number of earthworms tripled to 60 worms per square metre. Fox believes that with more years in no-till, earthworm numbers would keep climbing.
Medium- to fine-textured no-till soils need earthworms for sustainable long-term crop production, Fox believes. Dew worms can tunnel as deep as five feet. The tunnels, technically called burrows, get smeared with mucous and organic matter from the casts (worm manure) and become very stable, allowing easy flow of air and water through the soil profile.
As they travel through the soil, earthworms move nutrient-rich soil from the surface deeper into the soil, and also move nutrient-poor soil closer to the surface. In other words, they mix the upper soil layers, much like a mouldboard plow.
As well, earthworms drag crop residues and plant debris from the soil surface down into the burrows. On soils with good earthworm numbers, it's a key reason why soybean leaves disappear so quickly after leaf drop, Fox explains.
Fortunately, no-till is inherently kind to earthworms. Crop residues provide food and keep the soil surface cool and moist.
Growers may wonder whether, by eating residues and organic matter, earthworms rob the crop of a source of nutrients. Instead, says Fox, earthworms process organic matter together with soil, making nutrients such as nitrogen and phosphorus more available to the crop.
Earthworms are most active in spring and fall when soil temperatures range from eight to about 18C. As summer approaches and the soil turns droughty and hot, earthworms will burrow deep into the soil, wrap themselves into a tight ball and go into aestivation, similar to hibernation.
Fox tells growers to use her earthworm findings with caution. "We can't put an exact dollar value on earthworms or relate them to specific increases in crop yields," she says. "It isn't as simple as that." While earthworms are good for the soil, they're only one part of an extremely complex environment.
Some heavy soils, for instance, may benefit more from plowing than from no-till. They'll have fewer earthworms, but because crops such as corn may be poor no-till yielders on clays, they may still produce bigger crops.
Growers wondering about plowing a field that's been in no-till for several years, alternatively, must ask whether a single year of plowing will do a
better job of alleviating compaction and distributing nutrients through the soil profile than leaving the job to earthworms.
Earthworm numbers plunge after plowing long-term no-till soils in
part
because their tunnels are sealed off, but also because worms are
innately
sensitive to habitat disturbance and because plowing can destroy
cocoons
that are deposited near the soil surface. Only a small percentage
of the
worms are killed by the plow's cutting action.
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