Pre-Harvest Marketing In Taps

Welcome. This webinar is part of a series presented by the agronomic crops team from Auburn University and Alabama Cooperative Extension System. The series is brought to you by Optima Fields, [music] helping producers make smarter, data-driven decisions on the farm. We're glad you're here and hope you leave with practical, research-based knowledge you can put to work this growing season and beyond. >> Hi everyone. My name is Wendiam Sawadgo. I'm an assistant professor and extension economist at Auburn University and with Alabama Extension. Today, I'm going to talk about pre-harvest marketing, especially related to the TAPS competition in 2025. So, first off, in the TAPS competition, um, marketing was done in a variety of ways. Um, first piece of information to know was the teams had their two plots and then the corn yields for those plots was averaged out to determine their yield. And those were then simulated over 1,000 acres. So, in essence, the total production teams were basing their decisions off of would be their average yield over their plots multiplied by 1,000 acres. And the teams could either market their grain pre-harvest or sell it at harvest. And so, pre-harvest marketing comprised of three options, the first being forward contract, second, simple hedge to arrive contracts, and third, basis contracts. And then, anything that was not sold pre-harvest, that was harvested, would then be sold on the harvest date. So, the marketing, um, teams could use pre-harvest, um, they could had the book by each of those in 5,000 bushel increments. So, their selling was based on 5,000 bushel increments and then each transaction was $50. So a team could sell 20,000 bushels at a time if they wanted to for a $50 transaction or they could market 5,000 bushels but they would still have that $50 fee in a given transaction. And all marketing occurred through the AgriX Incorporated elevator in Montgomery. And this elevator has prices online on their website that are available every trading day updated about every 10 minutes. So teams could easily find what the current price was for harvest delivery all throughout the competition. Now a couple pre-harvest marketing basics. First thing to know is how is price calculated? Um the cash price is equal to futures price plus basis. Now the futures price, this is determined at the national level. This is through the Chicago Mercantile Exchange. Um it's basically the agreement to deliver corn at a specific date for the price that is agreed upon. And this is going to be the futures price is going to be the same at you know, every elevator that uses that, you know, either September or December futures contract for corn is typically what it's based on and that component's going to be the same uh geographically. Uh Now basis, this is where we get different prices because this really reflects what local supply and demand factors are. And so the basis component could be positive, it could be negative. You know, in the Midwest as we get more in the corn belts tends to be negative. Those areas as we get into the south, you know, really depend. There's some areas where it tends to be more positive. And so that's generally going to affect um, you know, transportation costs and other dynamics in terms of, uh, what's going on there and whether we have excess corn supply or we need more corn depending on the time of the year. And then, lastly, pre-harvest marketing oftentimes relies on hedging. And so, uh, we can hedge, you know, futures prices or that basis component. We oftentimes lock in prices, uh, with the goal of avoiding price declines. You know, price tends to decline as we enter those summer months, get into harvest when supplies of corn are plentiful. And so, if we lock in prices ahead of time, we can hope to avoid that decline. And one thing to mention though is if we lock in prices, that might limit our upside gain. So, if we lock in, uh, our entire production today, if prices increase tomorrow, we're missing out on those gains. So, just a few considerations with marketing pre-harvest. Now, first option for, uh, marketing was the forward contract. And so, recall if cash price is equal to the futures price plus the basis, well, the forward contract is the simplest as it locks in both of those components. Um, so, both the futures and basis component are locked in when we exercise a forward contract. So, let's consider executing a 5,000 bushel forward contract when the cash price for delivery, uh, at harvest for the new crop is $4.20. Um, that let's say that was a $4.50 futures component, -30 cent basis. At harvest, let's suppose the cash price is now $4.05. And so, the futures price is $4.30, the basis is 25 cents under. What we get here is, um, we locked in that forward contract, um, $4.50 futures component, um, -30 cent basis. So, the price received is going to be $4.20 per bushel. And so, if we're calculating our revenue for this uh contract, we would get $4.20 per bushel multiplied by the 5,000 bushels contracted minus our $50 uh fee there for a total of $20,950 in net revenue. And so, when we're considering a forward contract, um one of the things to remember is our cash price can really vary. And so, on the vertical axis of this, this is the farm price received. The horizontal axis uh represents what the price is. So, let's suppose our cash price right there in the middle, we're at $4.20. If the cash price goes up, what happens is if we haven't forward contracted, we receive that cash price. So, we might have opportunities to gain, but in contrast, if our cash price goes down, we're facing losses because we're getting that price at at harvest. In contrast, if we locked in our forward contract, if prices go down, we're we've still locked in that $4.20 contract. And so, the farm price received is going to be that $4.20. However, if prices increase, we're still locked in at that $4.20, so we're not able to capture those gains in that case. And so, you know, the forward contract does protect us from declining prices, but it doesn't allow us to capitalize if prices increase. And so, it's important to consider all of that when developing a marketing plan. Next, the second option is the simple hedge to arrive contract. And so, recall cash price is the sum of futures price and basis. Well, the hedge to arrive contract locks in the futures price components with the basis being determined at harvest. So, for example, let's consider executing a 5,000 a 5,000 bushel hedge to arrive contract when the cash price again is $4.20. So, the futures component is $4.50 basis -30. And at harvest, the cash price becomes $4.05. The futures drops to 430 and the basis strengthens to - of 25 cents. Well, with the hedge to arrive contract, we've locked in that futures components. So, we locked in that $4.50 for the futures. The basis is determined at harvest. And so, at harvest, the basis is -25 cents. Which means the price we receive for our corn for that 5,000 bushels is going to be $4.25 per bushel. So, our revenue $4.25 multiplied by 5,000 bushels, uh take out that $50 fee, uh we're looking at $21,200 in net revenue. Lastly, um third option is the basis contract. So, the basis contract is the opposite of the hedge to arrive contract in that we lock in the basis and the futures price portion is then determined at harvest. So, in the same example, we're executing a 5,000 bushel basis contract, um cash price at the time of executing that contract is $4.20 per bushel with a 450 futures component -30 cent basis. And then at harvest, suppose the cash price goes to $4.05 per bushel. So, 430 futures and -25 cent basis. In this example, with the basis contract, we're locking in that basis. That basis is -30 cents. We're allowing the futures contract uh component to be determined at harvest, so it gets that $4.30 value. And so, in sum, the price we receive is their $4 per bushel. And so, we find that revenue's going to be that $4 per bushel times 5,000 bushels, uh subtracting that $50 fee. So, we get a revenue of $19,950. So, now that we have looked through the different options for marketing, let's look at the results from the 2025 TAPS competition. And so, teams marketed uh their crop in a variety of ways. So, recall they had the three options for pre-harvest marketing: forward contracting, hedge to arrive contracting, and basis contracting. And then the remainder marketed through at-harvest sales. We see that three teams, uh team one, four, and eight, used pre-harvest marketing. Uh and they marketed different amounts. So, team eight uh sold about 2/3 of their grain pre-harvest, whereas teams one and four sold about 10% of their grain pre-harvest. Now, looking at the types of contracts that were used, most of the teams used forward contracts. Uh we see 84% of the grain that was marketed pre-harvest was done through a forward contract. 13% was done through a hedge to arrive contract, with the remaining 3% through a basis contract. The differences also reflected different strategies across teams. Uh team one, for example, they contracted an equal portion, um so 5,000 bushels in May, June, July, and August. Team four contracted all their grain in March, so 20,000 bushels booked in March, whereas team eight contracted in March and June. So, they used uh a variety of of their contracting, but it was all done in March and June. Now, looking at what corn prices looked like in 2025, so throughout the entire growing season, we see prices were highest early in the season. Um you know, the competition really started in March, so we're looking at April as kind of the peak prices, and then prices tended to decrease going into the summer. They reached a low uh in end of July, and then rose a little bit until August. And so, uh you know, August 9th was the harvest date, and we're looking there at a a price of $3.90 um was the price at harvest. Um there was a negative 30 cents basis on the date of harvest um as well. And so, looking at what this meant for the teams um average price obtained. And so, remember the average price included in this example um the pre-harvest marketing amounts um as well as any sold at harvest um taking into account the $50 transaction fee for marketing. And so, we see that the three teams that had sold grain pre-harvest had higher average prices. And this really reflects the declining nature of prices observed in this year's collection. And so, team eight that marketed 2/3 of their grain before harvest had the highest price at $4.15 per bushel. Um team four and team three had $3.93 and $3.95 per bushel, whereas the other teams that sold at harvest all got that $3.90 per bushel mark. And so, we see in this example uh hard marketing did play a a pretty significant role in terms of the average price received. Now, looking at some other factors, so just total revenue um as well as net returns, uh let's keep in mind that revenue was determined by, you know, the price component, but also several other factors. So, that included yield, uh which might have been affected by, you know, fertilizer applied, irrigation, and some of those. And then those were also entered into the marginal cost. So, we can't say that these results were purely because of marketing, but it can be useful to look at how marketing might have played a role in terms of revenues and costs received. And we see on the left side, uh the green bars show gross revenue. And so, teams 1, 4, and 8 were higher up in terms of um the revenues obtained compared to the other teams in the competition. You know, part of that might be because of higher yield, but some of that bump that makes the difference for teams that had similar yield might just be that highest higher um dollar per bushel value given the large number of bushels that were sold in this competition. Um you know, 3 cents or 5 cent per bushel doesn't seem like a lot, but over 1,000 acres that adds up quite a bit. And if we look at the net returns, um the two teams that were at the top were teams 4 and teams 8 right around $329 per acre in returns. Um team 1 was up there as well. Um those being the teams that had the highest uh amounts marketed pre-harvest. And so, you know, in conclusion, we see that pre-harvest marketing can allow producers to lock in prices to avoid price declines. Um you know, it represents a price risk management strategies that farmers might want to implement. The teams in the 2025 TAPS competition had different strategies. Uh you know, we saw a larger percentage of pre-harvest marketing was associated with higher prices in this year. And you know, while I don't want to overgeneralize the results, you know, the individual decisions are going to um the outcomes are going to differ year to year. So, looking at the team that was most successful in marketing in 2025, we can't say that would be the best strategy every other year. But in general, having a pre-harvest marketing plan can help farmers obtain higher average prices. And in fact, if we look at prior years of data, um we see over the past 20 years, um prices in the spring versus prices at harvest, uh prices are higher at spring time than [clears throat] at harvest roughly eight out of 10 years. So, uh there's some trends there that can be used as well. And so, as a result, having a pre-harvest marketing plan can be a good strategy to try to help obtain those higher prices. And so, thank you all for watching and uh feel free to ask me any questions. Also, my contact information is up there uh if you have any other questions. Thank you very much for your time. >> That's all for today's [music] session. Thank you for joining us, and a special thank you to Optima Fields for organizing and producing the webinar [music] series. For more resources from Auburn University and the Alabama Cooperative Extension Agronomic Crops Team, please visit our website at aces.edu or reach out to your local extension office. We look forward to you joining us again next time.