Lorenz provides grain marketing analysis for members

     New factors have entered the grain market talk picture in recent years - crude oil prices, ethanol, the global economy and index funds, Pete Lorenz, grain market analyst told Coralville Convention 2010 workshop attendees.
     Because of those influences, market tendencies have gotten a lot more volatile, Lorenz emphasized. In 2006, Lorenz said, "the markets started really gyrating."
     Two things set the cash price of grain, he added. One is futures. "The futures vary the most. They're bouncing up and down constantly," he added.
     The other is basis. From June 29 to Jan. 20, the average basis for South Dakota varied 50 cents. "That's pretty volatile. I'll tell you right now, it may get wider. It's at a record low basis, and it may get wider," Lorenz said at convention time.
     Basis is supposed to reflect handling, freight, profit margin, the cost of handling, keeping and storing the grain. That is what it's supposed to reflect. But it also reflects demand.
     Right now there's a lot of corn sitting out here, in western states, in bins or in fields. Producers know they need to sell it in next two months before it starts warming up in spring. Buyers know the grain is there, and they know producers need to sell it, so they can afford to lower the price.
     Lorenz gave an example. Hutchinson, Kan., is a delivery point for Kansas City Board of Trade wheat. If the Kansas City wheat price is at $6 per bu., Hutchinson Kan., is supposed to honor a contract delivered there at -6 cents per bu.
     So if Lorenz short sold a contract of wheat, 5,000 bu., theoretically he should be able to deliver it to Hutchinson for -6 cents per bu. "That's the theory. . . .The first of January, they had a 65 under basis. You could not deliver against the futures market."
     In January there was an 85 cent under to 90 cent under basis on average in South Dakota, and Lorenz is concerned it could get worse. There's a disconnect between the cash market and the futures market, and it must be dealt with through individual or group marketing, Lorenz emphasized.
     The volatility in the market that's happened has been created by index funds, Lorenz explained. "There's not a true reflection anymore between cash price of grain, and what the futures are in Chicago. I've been doing this for 36 years and I've never seen a basis that wide, never. And I believe it's because of the market volatility that's been created."
     The funds activity caused $147 per barrel oil two years ago, and they almost caused $8 per bu. corn in July, 2008. The fund activity sometimes works in favor of farmers, sometimes not. So, managing price risk and marketing and doing that well has become more critical.
     No matter what you're scenario is, whether you've sold grain or you've got some grain to sell, you've got some risk, and you want to transfer that risk to someone else.
     One tactic is through multiple sales. "I can't say enough. Form a marketing plan. Form a marketing unit, a group of people," he emphasized.
     Producers first must look at cashflow needs ahead, and know how many bushels of each crop will be produced, and how many can be stored. When considering delivery times, growers need to think about weather conditions, taxes, and road restrictions.
     Producers should consider futures options, and rely on forward contracts. Lorenz urges producers to tie together forward contracting and crop insurance.
     The first thing he asks producers is, 'Do you have crop insurance." The second thing is, 'What kind of crop insurance?'
     When growers have good coverage on their crops, it frees them up to be more aggressive in marketing.
     And Lorenz advocates sales contracts designed by the seller, the producer, rather than by the buyer. National Farmers contracts are designed for producers, and their groups, he emphasized.
     Lorenz pointed out, however, that if you're not holding your own grain any longer, you've lost some control of its marketing. "We've increased corn production to where we're growing over 13 billion bu. But we haven't increased storage," he said.
     "Anytime you have grain piled on the ground, it puts you at a disadvantage in the marketplace.Go to FSA. Inquire about building grain storage. Keep the grain on the farm. The minute you take it town you're done bargaining."

Marketing and Risk Management Choices
     "Picking up the phone, and selling over the phone," Lorenz said. "That's the wrong way."
     A cash forward contract, is a better option, where a representative places a certain amount of corn at a specified price for fall delivery months in advance. Four out of five years, producers are ahead marketing that way, Lorenz said.
     Other good options include basis contracts combined with other tools, or futures first/HTA contract combinations.
     Options work out as an insurance policy against price change. "If you're in a position where you have to sell grain, we'll work with you on buying a call option, so you can take advantage of that increased price," Lorenz explained. "Odds are this spring, we'll have a higher corn price."