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Whether to lock in selling price for corn is key decision for farmers

Whether to lock in selling price for corn is key decision for farmers

Skyrocketing input costs, speculating in the commodities markets, increased global demand for food e

Farmers, who are not gamblers by nature, are often forced by nature to gamble.

Leonard Logan, owner of Logan Farms in Fort Plain, grows corn and a few other crops. This spring he plans on planting about 1,500 acres of corn, which should result in about 330,000 bushels of corn. That’s a high number of acres for Logan historically, but down from last year. The price of corn is high, and could go higher if the Midwest experiences a serious drought over the summer. And that would be either good or bad for Logan, depending on if and when he decides to enter into a futures contract to sell his corn at a locked-in price.

“We don’t know where we’re going. We’re playing all new territory. We’ve got a whole new bag of beans,” Logan said. “Nobody knows where the limit is, and if you get in and lock in a profit and the price should go up $2 a bushel, that would cost me $660,000 in [profit].”

Skyrocketing input costs, speculators in the commodities markets, increased global demand for food enabled by a weakening dollar and increased government subsidies for biodiesel have all led to strange days for local corn farmers.

“Back 35 years ago, every year we sold for the same price. We paid for the same price for all of our inputs. Everything was the same for 10 or 15 years, and then things started to get all out of kilter and the fun all stopped,” Logan said.

Corn for September delivery reached highs of $5.34 a bushel on the Chicago Board of Trade Thursday. Prior to 2007, corn futures typically traded between $2 and $3 a bushel.

When a corn producer, such as Logan, enters into a futures contract to sell his corn at a set price, he can lock in a profit margin based on calculations of his input costs, as long as his yield is as expected. Should the market price of corn fall beneath the contract price, Logan would be paid the difference by the holders of that contract. However, if the price rises above the agreed-to price, Logan must pay the profit above his set price when he sells corn, known a “margin call,” back to the holder of his contract, crimping his potential profits.

“Hell, [when corn futures were trading] at $4, I was ready to get into it, but . . . I can’t get into it, because the market is going up so fast everyday. There’s no sign of it stopping. Last year we were selling corn for $115 a ton and now it’s $188,” he said.

Corn and soybeans

Kevin Ganoe, the regional field crop specialist for the Cornell Cooperative Extension of Fulton and Montgomery Counties, said local farmers are growing more corn in response to higher prices stimulated by ethanol production.

“The trend is to more corn . . . because the price of corn is very high, so they’ve seen an opportunity to take advantage of that price,” Ganoe said.

In 2007, New York farmers harvested 69.9 million tons of corn from 1.1 million acres of land, up nearly 8 million tons from 2006, when 100,000 fewer acres were put into corn production, according to the U.S. Department of Agriculture’s National Agricultural Statistics Service New York Field Office.

Logan said he’s profited from surging prices caused by corn being diverted to ethanol production. Still, he said he’s against ethanol, because it has distorted the corn market.

“With ethanol, the best thing they could do is cut all of the government subsidies and put it back in a jar and drink it. It’s a political joke,” Logan said. “That’s all it is. It’s tree-hugger food. I don’t like the whole thing because it’s adding to this damned price sum and it shouldn’t be there.”

Farmer Darin Blowers of Fonda said this spring he plans to plant about 500 acres of corn, 200 acres of soybeans, 100 acres of hay and about 90 acres of pumpkins and fall ornamentals. He said that’s the same formula he used before corn prices went up.

“It’s certainly been good for my business, these high prices, but the input costs are going extremely high along with the value of the corn. Fertilizers have tripled in the last few years, fuel has doubled,” Blowers said. “The expenses are so great I’m not changing anything that I do.”

Darin’s father, Richard Blowers, owns an adjacent farm to his son’s and rents some fields he plants on. Richard Blowers said he grows about 400 acres of corn and 150 acres of soybeans. He said each of the last few years he’s sold more corn for fuel pellets than for cattle feed, but increased production costs have cut into that product line’s profit.

“The margins are getting narrower for fuel. There’s a limit to what you can charge for it compared to the [wood] pellet market,” Richard Blowers said. “For feed, you’re making a little more money, but not what you’d think you would because of the cost to grow it. Nitrogen [fertilizer] was almost $500 a ton last year. They claim potash will be about $600 per ton this year. Those are outrageous prices.”

Neither of the Blowers have entered into futures contracts for corn because of the market volatility, despite greater risks incurred to them by higher input costs with no guarantees of a strong yield.

Pros and cons

Commodities trader Erik Oblon, owner of Chicago-based unitedfutures.com, said using futures contracts can be a good way for farmers to mitigate risk.

“What he’s doing is he’s locking in his price using the futures market. At that point the farmer shouldn’t really care if the price goes up or down because he locked in the price. He’s eliminating his risk onto a speculator in the market where the speculator wants to take on that risk for the purpose of profit,” Oblon said.

The prospect of returning profits rather than baring the risk of a bad crop or a price collapse himself, is more than Logan said he can bear.

“Last year was definitely like winning the lottery. For the next three years the prices look like that, but the problem is we have to have enough gumption to lock those prices in,” he said. “For instance, today corn [futures] were down 16 cents a bushel, and I produce about 330,000 bushels of corn. So I would have had a $55,000 margin call today. But we can’t lock in a price unless we take that risk, but I just don’t feel comfortable taking those risks.”

Logan Farms will plant a little less corn this spring than last year to take advantage of soybean prices.

“Soybeans are more profitable than corn, because the input costs for soybeans is only about $300 an acre and the net return [for soybeans and corn] is about the same, so you’re about $200 ahead,” he said.

September-delivery soybeans traded as high as $13.45 per bushel on the Chicago Board of Trade Thursday.

In 2007, New York state soybean production was 7.7 million bushels, down from 9.1 million bushels produced in 2006, although the number of acres in soybean production was slightly higher at 205,000, up from 200,000 acres in 2006.

Wheat attractive

If Logan had it to do over again, he said he would have planted 1,500 acres of wheat, not corn, instead of the 100 acres of wheat he planted in the fall.

When the USDA announced on Feb. 8 that the U.S. wheat stockpile was the lowest in 50 years, 272 million bushels, speculation on wheat prices reached unprecedented levels. March-delivery wheat hit an all-time high of $11.53 a bushel on Monday on the Chicago Board of Trade, but then fell back to around $10.15 per bushel by Thursday.

Logan said he expects the world to run out of wheat for the first time in history in 2008 because of poor weather conditions and bad communication to American farmers by the USDA.

“If I’d known this, I would have planted more wheat, but you don’t know. They won’t tell you. They said ‘No, there’s no problem, we don’t need any more wheat’ — trying to hold the price down,” he said. “They manipulated prices for years and years and years, trying to hold the prices down. Now they’re trying to get us to plant stuff and we aren’t strong enough to do it.”

In New York state, 100,000 acres were planted with winter wheat in fall 2007, down 5,000 acres from 2006 when 105,000 acres were planted, 95,000 harvested yielding 52 bushels an acre for approximately 4.4 million total bushels, according to USDA NASS New York Office.

Logan said each of his wheat acres could produce about 6,000 loaves of bread. He said he expects supermarket shelves to be bare of wheat products at some point in 2008.

“No bread, no cookies, no flour products of any type, crackers, cereal — none of it will be there,” he said.

Oblon said heavy trading has more than tripled the value of wheat and soybean futures in recent months, but that could change.

“All it would take is one bad planting season or a weather problem and that will send all of these grains to the moon,” he said.

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