Pre-Harvest Marketing, Crop Insurance A Dual Strategy For Business Sustainability

Many things in farming could be considered a gamble, including the weather and pest management, but locking in a price on at least some of the crop doesn’t have to be.

Andrew McKenzie, a professor in the agricultural economics and agribusiness department for the University of Arkansas System Division of Agriculture, said corn and bean farmers considering marketing a crop before harvest should take into consideration historical pricing data.

“Over a 10-year period, typically on corn and beans, you’ll see the highest on-average prices offered during the late spring or summer months,” McKenzie said. “I would be setting targets before that timeframe at higher levels with the hope history repeats itself and you can get those higher targets.”

Although that time window for higher prices is not a guarantee, McKenzie said it’s at least an opportunity to set targets at higher levels.

“If anything, this year has given us a message that looking for opportunities early in the season, even early spring, is something to pay attention to,” McKenzie added.

In January, when McKenzie presented workshops on pre-harvest marketing through the Fryar Price Risk Management Center of Excellence, he said prices were still above production costs. In July, when he gave another presentation to the Arkansas Farm Bureau, prices had dropped by about a dollar a bushel.

“At that point, you were lucky to break even, or you were in the hole,” McKenzie said of July prices. “If you can use the futures and hedge yourself on it to lock a price in, then why not do that?”

Holding on to a crop anticipating higher prices may pay off for some. But for many, it can lead to lower returns than expected or more expenses, McKenzie said. Low Mississippi River levels for three consecutive years have compounded the risk. With less barge movement on the river, grain elevators stay filled and push prices down.

Dual strategy

For farmers who plan to try pre-harvest marketing next year, also called forward contracting, McKenzie said the Fryar Center recommends crop insurance if pre-selling more than half of the crop to cover potential non-production risk. An example of non-production risk is the recent heavy rains and wind from Tropical Storm Francine during the 2024 harvest season.

“Pre-harvest marketing and crop insurance is a dual strategy,” McKenzie said. “If you lock in too many bushels with a futures contract, then the non-production risk is covered. That’s the perfect scenario with crop insurance and hopefully getting those higher prices together.”

While he does not have an economic survey on how much of a crop is typically forward contracted in Arkansas, McKenzie said his talks to grain elevator operators indicate a typical farmer would forward contract less than half their expected production.

This dual risk management strategy of forward contracting and crop insurance can offer business sustainability and peace of mind, he said.

No seller’s regret

A key point from McKenzie for those who try forward contracting is to not fall into a psychological trap of seller’s regret.

“I think farmers really get a negative feeling when they forward a contract with an elevator or a co-op, and then the price goes higher than their contract,” McKenzie said. “They want to beat themselves over the head with a stick. I think that's the wrong way to look at it, though. If you can lock a price in ahead of time above your production costs, then you should see that as a win, no matter what prices do after that.”

The U.S. Department of Agriculture measures production costs based on specific crops from September to the next September. The Arkansas Cooperative Extension Service offers crop production estimates with variable and fixed costs to assist farmers with setting price goals.

Breana Watkins, instructor of crop bugets and conservation economics and the person responsible for crop budgets for the Division of Agriculture, said when the budgets are updated this fall ,the webpage will be moved to www.farmplanning.uada.edu.

McKenzie holds the Fryar Endowed Chair in the agricultural economics and agribusiness department and is the associate director of the Fryar Price Risk Management Center of Excellence. He conducts research through the Division of Agriculture’s Arkansas Agricultural Experiment Station and teaches courses through the Dale Bumpers College of Agricultural, Food and Life Sciences.   ∆

JOHN LOVETT: University of Arkansas