The art and science of marketing corn
by Treena Hein
University of Guelph researcher provides insight into how to do it better
ON TOP OF choosing hybrids and managing their crop all season long, corn producers must also strive to make the best possible marketing decisions. Recent large fluctuations in price add to this challenge, making it difficult for producers to both achieve good timing and choose the ‘right’ marketing tools that will provide optimal profits.
“It’s a great idea to develop and use a marketing strategy,” says Richard Vyn, “but this is easier said than done, particularly due to the lack of good information about the relative effectiveness of various strategies.”
That’s why Vyn, an assistant professor in the department of Food, Agricultural & Resource Economics at the University of Guelph Ridgetown Campus, has developed a simulation model which compares the returns from a set of 18 marketing strategies that feature various marketing tools available to Ontario corn producers. Four strategies include the use of cash sales, three involve forward contracts, three use futures contracts, four use options, one uses basis contracts, and the final three use a combination of marketing tools.
Vyn ran the model multiple times across 18 years to generate an average price per bushel for each strategy, using historical cash and futures pricing data from the Ontario Commodity Reports (1992 to the present) and the Chicago Board of Trade. “The price for each strategy is compared to the baseline strategy, which is selling the entire crop at harvest,” he says, adding that development of the marketing strategies was conducted in consultation with both marketing specialists and producers.
In its calculation of returns for each strategy, Vyn’s model also accounts for the associated costs. For example, in strategies where the entire crop is not sold by harvest, storage and inventory costs are deducted from the selling price. Prices were selected from five three-week time periods during which large amounts of corn are usually marketed: harvest (October 21-November 10), early new year (January 5-25), spring (April 10-30), early summer (June 20-July 10) and late summer (August 10-30).
Vyn also calculated the ‘relative level of risk’ associated with each strategy – that is, the probability that the price generated for that strategy would be less than the costs of production.
RESULTS
“The strategies with the highest average prices across all years and the greatest price premiums over the baseline all incorporate short hedges using futures contracts,” says Vyn. “These strategies returned prices higher than the baseline strategy by between 29.8 and 32.8 cents per bushel.” The ‘put option’ strategies also tended to have much greater returns than the baseline, generating price premiums ranging from 17.9 to 27.5 cents per bushel.
In terms of relative risk, Vyn’s analysis determined it is greatest for many of the pre-harvest strategies. “These strategies appear to be more risky,” he notes, “but if the data for 2008 – when price volatility was very high – is omitted from the analysis, the risk posed is not as great.”
The simulation also indicates that making multiple cash sales throughout the year does not generate significantly higher prices relative to the baseline strategy of selling everything at harvest time. “Basically, we found that any profit increases due to higher prices occurring in the months after harvest are offset by storage and inventory costs,” says Vyn. “In addition, spreading cash sales out over the year does not appear to reduce relative risk.”
Vyn went a step further to analyze whether some strategies were more effective than others across different types of market conditions. “I split the model results into two groups – results for years in which pre-harvest prices are greater than costs of production and results for years in which prices are below,” he says. “I found that for the high-price years, again it’s the strategies that involve futures contracts and options that generated the highest average prices, but with much greater price premiums than if all years are examined.” Conversely, during low-price years, there were only small differences in average prices across all strategies.
Overall, Vyn says the results indicate that pre-harvest marketing strategies for corn that use futures contracts and options are most effective compared to the baseline strategy. “They returned the best average price, particularly in years where the pre-harvest prices are greater than the costs of production,” he says. “However, in years when prices are lower, and are below costs of production, pre-harvest strategies may not be better than selling everything at harvest.”
Vyn believes producers should take these differences in the relative effectiveness of strategies between high-price and low-price years seriously. “I think they should think carefully about using the same strategy every year, even if that strategy has been found to perform better on average across all years compared to other strategies,” he says. “I definitely recommend using different strategies in response to the current set of market conditions.”
Richard Vyn's full research report is available here.