Despite the economic turmoil swirling around the globe, Greg Simpson is “pretty calm” going into the new cropping season. The reason for the southeast Arkansas farmer’s peace of mind: a solid marketing plan. With an average 2009 crop, Simpson won’t have to worry about a futures price much below $9.60.
After working out the plan with marketer Steve Scott of Scott and Associates in Little Rock, Ark., Simpson should do even better in 2010 and also knows if prices trade higher he is in position to do much better.
“I’ve got about 5,600 acres in cotton, corn, soybeans, rice and wheat — a wide crop mix,” says Simpson, who farms near Tillar, Ark. “I’ve been farming since 1982, when I got out of college and came home to work with my father. He’s retired, now. I’ve been at this for about 27 years.”
Before he began working with Scott in the early 1990s, Simpson did nothing when it came to marketing his crops. It didn’t take long for him to become a true believer. “Steve knows the marketing side really well. It’s his job to keep up with the best approaches to it and he does it well. Being his client relieves me of one more thing to keep up with and worry about.”
Simpson has used options for years. “We started using options ever since we began working together.”
Simpson laughs when asked if he’s yet settled on a cropping mix for 2009.
“No, to be honest, I have no idea what I’m going to plant. I’ll plant some cotton. That wasn’t the original plan, and we were planning to cut more of those acres. But I’m down to about 1,000 acres of cotton and want to keep that steady.
“I’ll probably drop corn acres to around 1,000. That means we’ll have probably about 800 acres of rice with the majority of the acres going to soybeans. That’s the way it looks now. I may end up planting more cotton — it just depends on the market between now and planting. We’re all watching the soybean prices — the price has been going down lately. I just want to leave options open.”
Also in Simpson’s marketing mix is 120,000 bushels of storage. He’s in the process of putting in another 150,000 bushels worth.
The rationale for the storage is simple: a wide basis that seems to be getting wider. “The basis really hurts the producers in this area. When I sold all my beans — I had all rice in the bins — the basis was around 82 cents. That’s prohibitive. For a guy who was able to store his beans and sell them after the first of the year, the basis had dropped to 8 cents. That means on-farm storage allowed those farmers to make 50, 60 or 70 cents per bushel just by capturing the basis difference.”
The same was true of corn. The basis in-season was around 62 cents.
“For guys with corn in the bin who delivered it after the first of the year, the basis was at as much as positive-20 cents. People around here that are selling corn to Tyson in Pine Bluff, Ark., and some other chicken feed mills are even receiving a positive basis, in some cases.”
Often when the crop year is over, the price of rice the following spring or summer has gone up. “We’ve been able to make as much as $1 or $2 per bushel extra in some years.”
Mid-South growers are also facing the new reality of skittish elevators. Last year, when the market prices went up to $15 and $16, “some elevators shut farmers off completely. They wouldn’t let us book anything. When the market pulled back, they were more willing to book.”
In the past, elevators would let farmers book a year or two out. “We used to do some of that. In fact, I have some 2010 crop booked that was set up before the long-term bookings were shut off. Now, all they’ll talk about is the current year’s crop.”
Since that’s occurring, it’s making Simpson “look out and protect the prices for 2010 and 2011. If those are favorable, we’ll have to lock those in ourselves by hedging the market and selling futures.”
The problem with that, of course, is the threat of margin calls. “With big run-ups like we had last year, you could be making those calls. But I expect to have more crop to sell at the higher prices, which offsets the margin risk.”
Because elevators are less willing to book too far out, producers are being forced to rethink their marketing approach.
“From a farmer’s perspective, we’ll have to hedge our crops out in the future instead of taking the risk that there will be good prices. History shows when prices run up, they don’t stay for long. I think farmers will have to be in a position — and the bankers will have to be in the boat with us — to hedge crops ourselves and stay with it when we have to make margin calls. A good banker will understand that process and stay with you. Farming is too risky nowadays not to protect yourself out into the future.”
How are lenders in Simpson’s area dealing with the economic crisis?
“We haven’t had any problem with the bank I deal with. But they’re understandably more cautious and leery, right now. The banks are like farmers: very scared of what may be out there. The high prices we had last year scared a lot of people in agriculture. We couldn’t believe how high the input costs got. That’s got farmers and lenders concerned going into 2009.”
Fuel expenses are a major worry. “I bought fuel last year for $4.38 per gallon. A tanker load cost us $32,000 to $34,000. The other day, I bought a tanker load for $11,000 — so I can buy three loads currently for what we paid for one last year. Fertilizer costs were the same way.”
Crop prices at the beginning of last year were so good, “it was hard to believe farmers wouldn’t make any money. But no one dreamed the input costs would go sky-high like they did. That blew profits out of the water.”