Growers use Cargill expertise to reduce grain-selling risks.
One-fourth of the corn rolling out of Mark Wankel's combine this fall will earn the Illinois grower at least $2.49/bu. Wankel sold part of his crop through a new marketing program from Cargill to help control his market risk and manage costs.
He was among several thousand growers who signed the unique contracts last winter. "The contracts are doing excellent," Wankel says. "I wish we could have put all of the crop in them."
Fall corn bids in his area now run $1.50/bu. "The contracts will make us [an extra] $1/bu.," Wankel says.
The Petersburg, IL, grower admits that last February when he signed the contract, he wondered if it was the right thing to do. Drought concerns had boosted prices and he was uncertain of his crop. But as rain returned to the Midwest, prices dropped and Wankel was glad he had taken advantage of the program.
Minimum price contracts. Cargill AgHorizons offered the Average Plus contracts for corn and hard red wheat with fall delivery. Average Plus guarantees a price that will not be less than the average futures price of December corn and July wheat from February 1 to June 30, 2000. During this period, December corn futures averaged $2.49/bu. and July hard red wheat averaged $2.99/bu.
Such a contract helps growers manage input buys by taking some risk out of the open market. The program especially helps growers who are concerned that harvest delivery futures prices will be lower than preharvest prices.
Although growers may contract up to just 25% of their production, the Average Plus program provides a cushion should the market drastically drop. Wankel contracted the full amount Cargill allowed - 20,000 bu. of corn.
The contracts are producing profits because corn futures dropped below $2/bu. in late July. Hard red wheat futures for July ended $0.35 below the contract average.
A sellout. Last year, Cargill tested the contract idea with just a few growers. This year, the company operated the program on a wider scale. The time period for sign-up was six weeks, ending January 31, 2000. But all the contracts were filled in a few days, according to Rick McLellan, Cargill's Performance Agriculture leader. Any grower could participate in the program.
Under the contract program, Cargill will manage its corn hedging activity until September 29. At that point, if any gains above $2.49/bu. are made on the contracts, Cargill will give two-thirds of the gain to growers and keep the remaining one-third. The company reports it is currently averaging $2.56/bu. in its hedging activities, which will provide additional revenue to Wankel. In contrast, at the end of July, corn futures reached $1.94.
Pricing for the hard red wheat contracts ended at an average of $3.16/bu., well above the average futures price of $2.99/bu. With two-thirds of the gain, producers will receive $3.11/bu.
Growers agree to fall delivery of the grain to Cargill-approved facilities. They still must manage the basis. Wankel's basis is $0.30/bu. delivered to a Cargill terminal 23 miles away on the Illinois River. So he will be paid $2.19/bu. for the contract amount.
Marketing advantage. Cargill designed the program after growers asked for help marketing grain, McLellan says. Because Cargill specializes in selling grain, the company decided it should use that expertise to help growers. It tried the program on a limited basis and managed its risk with hedges.
The company plans to expand the program to more producers next year. But it intends to still limit the amount that each grower may put into the program to 25% of production. This will ensure growers maintain a balanced marketing portfolio.
So far, Cargill's hedging activities have provided a profit to the growers beyond current market prices. The additional price will help growers manage their costs as they head into next year's crop season.
For more information, call your local Cargill AgHorizons facility, visit www.cargillaghorizons.com or circle 210.