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How to market grain in a dry or drought year

By David Bau, Extension Educator, University of Minnesota

How should a farmer approach commodity marketing plans in a dry year? Last year was the driest year on record since the 1950s in the United States. Crops varied widely across the country, but Minnesota was fortunate to receive May rains and timely rains thereafter in parts of the state. Minnesota's average corn year led the country. Unfortunately, going into the 2013 crop year, Minnesota's sub soil moisture is at extremely low levels--much lower than the 2012 conditions. What can a farmer do to enhance their commodity marketing under these conditions?

Start by considering purchasing a higher level of insurance coverage. The majority of farmers purchase 75 percent coverage level and some form of revenue product that insures both yield and price. The prices for soybeans and corn are set at the average of the November and December futures contract during the month of February each year. The 2013 prices are set at $5.65 for corn and $12.87 for soybeans. A harvest price is set with the average of these future contracts for the month of October. The revenue insurance sets a total revenue guarantee at the APH (actual production history) multiplied by coverage level (75 percent), multiplied by the spring price (February average). If a farmer purchases a higher coverage level, they have purchased a higher total revenue guarantee that could cover expenses if below-average yields occur due to dry conditions.

A farmer should consider optional units over enterprise if their farmland quality varies significantly. With enterprise insurance, your premiums are much lower, but it requires crop losses across a broader region. Your whole-farm average yields have to be below your coverage level to get indemnity payments. While with optional units, if one or more of your fields have lighter soil, they would receive an indemnity payment on how each field performs--not your entire operation's average yields.

Pre-harvest marketing historically has been beneficial to farmers by locking in higher prices than are offered at harvest. But going into 2013, corn prices could go to above $8 if drought continues or decline to under $4 if a near normal crop is produced on a large planted acreage. Therefore farmers are hesitant to prepare their 2013 marketing plan and sell any crop at near breakeven prices and well below 2012 crop prices.

As the first part of every marketing plan, a farmer should determine their 2013 estimated breakeven prices. This would be the starting or minimum price for pre-harvest marketing their 2013 crop. A more conservative approach due to the drought conditions might be to lower expected yield below the APH. I might also lower the percent of my crop I am willing to price in my pre-harvest marketing plan to compensate for the current moisture levels.

Art Barnaby, one of the originators of the crop insurance policy from Kansas State, said, "If you buy crop insurance and don't do pre-harvest marketing you are wasting your insurance money."

But with crop insurance--even if you sell 75 percent of your crop pre-harvest--you have some assurance that if your yields are lower than 75 percent of APH, your insurance will reimburse you for the lower yield at the spring or harvest price, whichever is higher. Make sure you do not use the Harvest Price Exclusion product. This way, if prices are much higher at harvest than spring, you will receive a higher guarantee price and be able to repurchase any of your pre-harvested grain that you did not produce with the insurance revenue.

Once the spring price is set for revenue crop insurance, a farmer should not sell below this price or risk losing some of the insurance coverage. Farmers could discount the APH yield as well if drought conditions exist and use this lower yield to. If you choose this option you should recalculate your higher estimated breakeven prices with the lower yields and adjust your marketing plan accordingly.

Each year is different, but if you have a proactive marketing plan in place, you will be better able to adapt to what happens in each crop marketing year. You'll also be prepared for a short crop if the drought conditions persist.