Ag economists warn farmers to contract now, not in fall

LITTLE ROCK — Farmers grasping for any handhold in a downward sliding agricultural economy need to remember two words: “forward contracting.”
Extension Agricultural Economists Ryan Loy and Hunter Biram, in episode 49 of “Morning Coffee and Ag Markets” podcast warn that many Arkansas farmers may not be able to break even this growing season.
“While the decline in commodity prices is very concerning, seasonality has tended to favor the price increases in this pre-harvest window,” Biram said.
Farm storage bins enable growers to hold grain for more favorable market landscapes. (U of A System Division of Agriculture photo by Kerry Rodtnick)
Loy and Biram said June and July are the times to “forward contract for harvest delivery.”
“What we’re cautioning against is not pricing crop ahead of time and being at the mercy of cash prices at harvest, which are the lowest prices of the year due to the abundance of supply at harvest,” Loy said.
Scott Stiles, extension agricultural economics program associate, said “History supports forward marketing.
“Since 2000, futures prices in the first six to seven months of the year have outperformed harvest prices 79 percent of the time for corn and 71 percent of the time for soybeans,” he said. “There will be exceptions, but the odds favor making some early incremental sales of 10 percent of expected production.”
Early in the production cycle, grain and cotton markets are typically volatile due to uncertainty about U.S. new crop acres or South American production.
In 2016, Brazil surpassed the U.S. as the world’s largest producer of soybeans.
“Early in the calendar year, the soybean market is very sensitive to growing conditions in the Southern Hemisphere,” Stiles said. “This can create marketing opportunities for both old crop bushels in storage and unpriced new crop production. These opportunities can be captured either in the local cash market or in the futures market by way of options.

“Generally, we see some price strength in February, March and April as fieldwork gets underway in the U.S. and harvest is ongoing in South America,” he said. “Prices tend to relax some if U.S. planting goes smoothly. Another push higher in grain prices is common between mid-June and early July on any Midwest weather concerns.
“As the growing season progresses, the market develops an idea of crop size and price fades lower in most years from mid-July into peak harvest,” Stiles said.
Adding to the pressure for farmers “is the fact that no commodity price has been above breakeven point this year,” Biram said.
What is “breakeven?”
Generally, “breakeven really just means that you did not earn a profit and you exactly covered your expenses,” Loy said. “ Profit is zero and you’ve covered all your expenses. In this case, we are actually saying our breakeven is just above our operating expenses.” Covering operating expenses, in this case, is to ensure the farm can continue to operate its day to day activities, even though it may not yet cover long-term fixed costs or capital investments.
The Cooperative Extension Service has a Profit/Loss calculator that can help farmers — whether they own or rent land — figure the price they needs to get for their crop to break even.
For example, “when we say the breakeven price is $4.10, that means that that’s the price that you should receive for your corn to make sure that you cover all of your expenses,” Loy said.
Biram said the ag economists update the tool as needed.
Unfortunately, the market may not provide opportunities to sell above a farmer’s break-even price. However understanding what price a farmer needs will significantly improve marketing decisions, Stiles said.
“Look at the tool,” Biram said. “This is the time to be making some very serious decisions. This may be the best price environment.”