- MARKETING -
Production & Market
|By Todd D. Davis and |
Charles E. Curtis, Jr.
The profitability of soybeans is often directly related to how well the farmer manages production and marketing risks. Decisions made in the selection of soils, fertility scheme, variety, pest management
Information in the 2009 South Carolina Soybean Production Guide gives details about how the South Carolina farmer can make good choices. The following is a discussion of production and marketing risk management in the context of enterprise budget analyses for soybeans.
What are enterprise budgets?
Of course, a producer will need to adjust the figures given for the cost inputs for his or her operation. Enterprise budgets are prepared by the Clemson University Department of Applied Economics and Statistics (see Useful Link).
Variable costs are those that are incurred each year the crop is produced and are basically the out-of-pocket expenses for seed, chemicals, fertilizer, labor, machinery and interest. These may vary from year to year, field to field and farm to farm. This is why producers must be aware of their average expense figures for each cost component.
Fixed costs are those incurred even if a crop is not planted. Such things as depreciation and taxes on equipment are fixed costs. Farmers may choose to ignore the fixed-cost component for a year or so when planning the farm’s crop mix.
However, over a period of several years, producers need to be able to cover total costs to maintain an economically viable cropping system. Farmers are also urged to consider various market and production risk management scenarios to try to capture the highest profit possible.
Total production costs are estimated to be $277 per acre with fertilizer and lime costs accounting for 30 percent of the total cost per acre.
In addition, seed, tractor/machinery and pesticide expenses account for 13 percent, 14 percent and 24 percent, respectively, of the total cost per acre. The harvest cash price, based on the value of the November 2009 Soybeans Futures contract of $9.63 per bushel and adjusted by an estimated harvest-time basis of -$0.30, is estimated to be $9.33 per bushel.
Given the revenue and cost estimates, the Return over Variable Costs for soybeans is estimated to be $50 per acre.
Understand production costs increase
Variable costs have increased $153 per acre since 2002 with 80 percent of the increase occurring since 2005.
Most of this increase is due to a change in production assumptions used to create the 2008 and 2009 budgets.
However, the largest increase has been for fertilizer and lime, which increased $47 per acre since 2002 and accounts for 31 percent of the total variable cost increase since 2002.
In addition, the cost of seed has increased $15 per acre since 2002. Another large increase has occurred in hauling expense, which has increased $8.75 per acre since 2003.
This cost information will help managers understand which cost items have increased the most and, in turn, which items to focus on when monitoring costs. It is important to cut the non-necessary expenses and to use inputs in a way to get the biggest return for the cost of the input.
Therefore, sound management practices should be used when managing costs. For example, soil tests can be used to determine fertilization rates, and increased scouting for weeds and insects can be used to monitor pesticide costs.
Controlling market risks
Know what you need from the market to be “successful.” This is accomplished by knowing the true production costs of the enterprise on your farm. Further, one must account for family living expenses and long-term financial goals. An assessment of “successful” is the key to this step. However, this important concept is one that varies substantially from farm to farm.
Know where the market is now. This requires access to and the ability to correctly interpret soybean price information. The best starting point is knowing the current Chicago Board of Trade (CBOT) futures price for the month in which one plans to sell.
Prior to harvest, the CBOT November futures price is typically the best gauge for what the market thinks next year’s crop will be worth at harvest. This price should be further adjusted by your basis estimate that you expect to prevail at harvest. If considering storage, one must further account for the physical and interest costs of storage.
Categories of marketing alternatives
1. Do nothing now: This clearly is the most often followed strategy. Whether through simply avoiding the marketing or pursuing this as an objective strategy, this approach assumes that the price captured later will be better than today. If this fails to materialize (i.e. prices fall), then there is no downside protection. Strategies that fall into this general category include unpriced production, unpriced storage and delayed payment contracts.
2. Fix the price today: If the market were currently offering a price at which one would be “successful,” then one would be wise to accept it. However, prior to harvest when yields are unknown, it is not advisable to obligate the entire expected crop for sale.
Contract penalties can occur if a producer over-contracts a volume of production and prices rise. Further, this approach carries the implicit assumption that the price captured now will be better than it will be in the future. Strategies that fall into this category include cash forward contracting, hedging (partial), hedge-to-arrive contracting (partial) and basis contracting (partial).
3. Fix a price floor, but leave the ceiling open. This approach to market risk management allows for the best of both of the above while avoiding many of the potential drawbacks.
Through the use of put option purchases, call option purchases in conjunction with cash forward contracting, buying call options instead of storing, or by seeking minimum price contracts, producers can protect their operational revenues from subsequent price declines while leaving open the possibility to benefit from future price rallies. Clearly, this approach is one worth exploring.
Plan, follow through and update
Seek the unbiased opinions of others. Other farmers, agricultural lenders and Extension personnel (among others) can often help you weigh the alternatives you are considering. It is important to stay grounded in the reality of market risk management and not move into the realm of speculation. Seeking opinions can help sort through the complexities, but remember the final decision is yours!
Make the decision and follow through. The best-laid market plans avail us nothing if the “trigger isn’t pulled” on placement of the strategy. This is easier said than done. But if the above steps are taken, then one should feel confident in the know-ledge of risks to be transferred or retained.
Review the plan and adjust as needed. Because of the dynamic and ever-changing markets for corn (and other agronomic crops), it is important to review periodically the plan that is in place.
For example, let’s suppose at planting you observed a good price but only felt comfortable with pricing 25 bushels per acre. Suppose now it’s late August and you’re much more certain of your yields. You need to revisit your plan and review the necessity for leaving the remaining crop unpriced. The risk environment has changed, so your plan requires reviewing and updating.
Enterprise budgets: http://cherokee.agecon.clemson.edu/budgets.htm.
How Risky Are Soybeans In 2009?
Another question managers should consider when
evaluating a crop enterprise is the risk of not covering
The Total Variable Costs for soybeans is estimated to be $277 per acre (Table 1).
At an expected yield of 35 bushels per acre, the break even price for soybeans is $7.91 per bushel.
At this break even price, there will be just enough revenue to pay for the variable costs listed in Table 1.
Table 3 describes the Return over Variable Cost for alternative prices and yields.
Managers can use Table 3 to evaluate the risk of not covering variable costs of producing soybeans based
For example, at the price of $9.00 per bushel, there would be revenue available to pay for all production expenses with yields of 35 bushels per acre or greater.
At a yield of 30 bushels per acre, all variable costs will be covered with prices of $9.50 per bushel or greater.