Kub's Den

Keeping Up With the Joneses

Elaine Kub
By  Elaine Kub , Contributing Analyst
Schnitkey, G. and J. Coppess. "Pre-Harvest Hedging and Revenue Protection." farmdoc daily (8):88, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, May 15, 2018. (Source Data)

It's generally considered rude to ask a farmer or rancher how many acres they own or how many cattle they have. On the other hand, if two neighbor farmers discuss how much grain they've sold or how their marketing plans are going, it's usually a welcome topic. The responses might not always be true ("Oh, I sold 70% of my beans at $10.50!), but the subject is one that farmers enjoy discussing with each other. They might compare their own choices to those of the rest of the gang at the local coffee klatch, or perhaps they participate in more formal peer networks to establish benchmarks.

One thing farmers don't do -- because they can't do it -- is compare themselves against the entire farming population's marketing decisions. A field's growing condition or yield can be confidently compared against the county, state and national averages, which are real numbers measured and released by the USDA. But the farming population's marketing decisions? What percentage of the 2018 corn crop is currently hedged by a forward contract or futures/options contract? There is no unbiased, independent source that measures and publishes such data.

Until now.

Agricultural economists Gary Schnitkey and Jonathan Coppess from the University of Illinois last month released the results of a survey* they and the Illinois Corn Growers Association administered to corn producers across the Midwest. The survey didn't have a large or a randomly-drawn sample (only 194 responses from self-selected survey participants), so it can't be used to draw statistically-valid conclusions about the entire population of U.S. farmers. Nevertheless, its results showed interesting patterns in pre-harvest hedging practices, which all farmers can use to consider their own risk scenarios and evaluate their own marketing plans.

The survey responses came from Indiana, Iowa, Kentucky, Missouri, Nebraska, North Dakota, Ohio, Oklahoma, Texas, Wisconsin, and 70% from Illinois, all indicating how much of the farmers' expected 2018 corn production was hedged by a forward or futures contract by April 1, 2018. Also, the survey asked what proportion of their corn crop the farmers typically like to pre-harvest hedge by the following benchmark dates: January 1, April 1 and July 1.

Of these 194 farmers, only 16% said they hadn't hedged any of their new crop corn as of April 1, 2018. The average indication was that by Jan. 1 these farmers typically had about 10% of their upcoming crop hedged; by April 1 they typically had about 22% of their upcoming crop hedged and by July 1 they typically had about 41% of their upcoming crop hedged.

July 1 is right around the corner, so this is a perfect opportunity for readers to compare their own 2018 marketing progress against this sample of fellow corn producers.

Only 9% of the survey respondents said they typically didn't have anything sold by July. That jives with my instincts about the farming population's marketing habits. It would be unusual for someone to have totally procrastinated up to this point. And farmers are more likely to choose proactive or aggressive marketing strategies based on their individual risk profile, which is partly a matter of personality, but mostly a matter of circumstances.

Schnitkey and Coppess's survey helpfully sorted the responses according to farm structure. Was farming the sole source of household income? The primary source of household income? Or was off-farm income "very important" to the household? Furthermore, how much of farmland was rented? Higher proportions of rented farmland are associated with increased financial risk.

Sure enough, those survey respondents with the most at stake -- the ones with a lot of rented ground or their entire household income dependent on farm profitability -- were the ones with the most conservative marketing practices. Forty-two percent of the respondents said that farming was their sole source of income, and these were the ones who were more likely to have upwards of 10% of expected corn production hedged before April 1 (72% of them did). Among those who had diversified off-farm income, there was more willingness to gamble on upcoming corn prices -- 29% of those respondents said they had nothing hedged as of April 1, 2018.

A similar pattern was seen in the risk profiles according to the percent of farmland that's rented. The survey respondents with the most at risk (the ones with over 90% of their farmland rented) were the ones most likely to have conservative hedging in place by April. The most common response was that they had somewhere between 25% to 50% of their expected corn production hedged with forward or futures contract by April 1, 2018.

Again, I'll caution that just because these 194 corn producers said they like to have 41% of expected production hedged by July 1, we shouldn't be too confident that the entire population of U.S. farmers behaves this way, or that 41% of the actual 2018 corn crop will really be priced by that time (especially not with the markets in their current condition). This surveyed sample was drawn from the members of state corn growers' associations, so it was likely already biased toward proactive agriculturalists. I'm particularly suspicious that among the general population of farmers, there might be a much higher proportion than 16% who didn't have anything locked-in by April 1. I've also always wondered how marketing practices differ from state to state or region to region, and this survey, with respondents who were so concentrated in Illinois, can't address that question.

Still, it's a treasure trove of data. It allows individual grain marketers not only to benchmark their own plans against a broad average, but more importantly, to consider how their own risk circumstances may be shaping their behavior. There is always fear of marketing too many bushels before planting weather and yield uncertainty have been resolved (fear that is somewhat mitigated by crop insurance policies that include a Harvest Price Option). But perhaps that fear should be weighed against the risks of getting left behind. This seems frustratingly true in 2018 when outside markets and geopolitical risks have disrupted the typical seasonal price pattern in the grain markets.

Schnitkey and Coppess's survey showed pre-harvest corn marketing decisions in just one snapshot of time. It's a nearly impossible task to gather this information broadly or consistently year by year or state by state, because no one likes to give out private business information. But what a fascinating snapshot it is, and what an opportunity to evaluate one's own choices.

*Schnitkey, G. and J. Coppess. "Pre-Harvest Hedging and Revenue Protection." farmdoc daily (8):88, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, May 15, 2018. http://farmdocdaily.illinois.edu/…

Elaine Kub is the author of "Mastering the Grain Markets: How Profits Are Really Made" and can be reached at elaine@masteringthegrainmarkets.comor on Twitter @elainekub.

(BAS/BE)

Elaine Kub