Iowa Farmer Today
02-17-07
Open markets, contracts figure into marketing plan
By Jeff DeYoung, Iowa Farmer Today
WASHINGTON, Iowa -- Selling crops or pigs on contract is just another farm
management tool for Rob Stout.
“We do some contracting, but we also like to have the option of doing our own
marketing,” he says. “I think you need to always have options.”
Stout, who farms with his father, Bob, near here in Washington County, has
grown specialty soybeans for the past four years, including low-linolenic and nonGMO.
He belongs to Asoyia and Innovative Growers, using both groups to market
soybeans at a premium.
Stout is also a part owner of the Wellman Feeder Pig Cooperative. He gets early
weaned pigs and sends them to an off-site nursery before finishing them on his
Southeast Iowa farm, marketing about 6,000 pigs yearly.
This year, Stout says he has contracted some acres through Asoyia. He says the
contract is already offering $8 per bushel for beans delivered in November.
“Because we are contracting acres, we will be rewarded for a good crop and not
penalized for a bad crop. We really like that,” Stout says.
“If you contract bushels, you could be left with specialty beans you will have to
market as commodity beans or you could be stuck looking for beans to fill that
contract.”
Before growing specialty beans, Stout says he dabbled in contracting some crop
production, including white corn. He also used contracting with his hog operation,
adding most of his hogs are sold through the open market.
“I can contact an individual packer, and they will give me a basis for a particular
month, and if I think it’s a fair price, I might go ahead and contract some pigs,”
Stout says.
“But, I prefer to have four or five packers bidding on my pigs. We have very good
packer competition in our area with four plants very close by, so we are able to
take advantage of that competition.”
Contract production is becoming more common, particularly in the hog industry,
says Nigel Key, an ag economist with USDA’s Economic Research Service
(ERS) in Washington, D.C.
But, Key says producers are willing to give up that autonomy at a price. He adds
that price could be about a 12 percent premium above the cash market.
Key and fellow ERS economist James MacDonald based their findings on data
up to 2004. Every six years, Key says the ERS looks at the hog industry from an
economic perspective.
He says hog producers value autonomy over their operation, but adds most are
becoming less risky when it comes to marketing.
“Producers entering into contracts with their hog production is done for several
reasons and avoiding great risk is a large benefit,” Key says. “From a packer
standpoint, it’s valuable to them to better ensure identity preservation and quality
control.”
Key says producers’ relationship with their lender is also a contributing factor to
more contracts.
“The lender sees less risk when a producer signs a contract, and we’ve found
that producers who are contracting some of their production are often able to
have access to more credit and the ability to take on more debt,” he says.
“Producers also cite the benefits of getting better access to quality genetics
through their contractors, as well as access to veterinary services and other
information.
The growth of contract production has come at the expense of the cash market,
Key says. Producers sense volatility in the markets, he notes, and look to protect
themselves.
“Your typical risk-averse farmer should be willing to pay something to have the
risk reduced,” Key says. “But, we see farmers actually earning a little more by
contracting, by getting that premium in exchange for giving up their autonomy.”
Grain farmers looking to avoid risk need to carefully consider all possibilities
before signing on the dotted line, advises Bob Wisner, Iowa State University
Extension grain marketing economist.
“You really need to look at what is going to happen to your costs because we
expect costs to rise considerably in the coming years, particularly with cash
renters,” he says.
“You’re going to see increases in fertilizer and chemicals, especially with the shift
in planting acres.”
Any contracts must offer growers protection against other variables, Wisner says.
“What kind of tools are you using to protect that price?” he says. “How can those
tools withstand these potentially explosive markets we could be seeing,
especially in terms of weather events both here and abroad?
“Those are questions you have to ask.”
Stout says he realizes grain production is entering a volatile stage. He buys little
corn for his finishing operation, but buys corn for his off-site nursery.
The Southeast Iowa farmer also purchases soybean meal. Some analysts
believe meal prices will increase as soybean acres decrease.
“Corn has been the biggest factor in our increased cost of production, much more
so than soybean meal, but we know we need to keep an eye on it,” he says.
“Locking in our feed costs is going to be very important.”
Stout is confident the increased demand for low-linolenic and other specialty
soybeans will pay off for his operation.
“I think more people are interested in it because of the premium we are
receiving,” he says.
“We feel through our contracted acres, we are going to be able to protect
ourselves. I think we’re in a pretty good situation right now.”