Dr. Greg Roth
Penn State Agronomy
Asociate Professor
On many dairy farms in Pen
nsylvania, com and alfalfa are
When It Comes To Corn,
Risk-Reducing Instruments Are Risky
tract to buy com from titeir far- tracted to g et increasingly
mer customers specifying an favorable cash price. The eleva
amount, price, and delivery tors coughed up more and more
date. A common practice margin money as their short
involves the delivery of com to portions became further and
the elevator at harvest, with further below market prices,
only the timing of price deter- Farmers saw the cash price
mination specified in the con- g 0 higher and higher. So rather
tract. The elevator hedges its than deliver com with cash con
position by selling futures tracts for $3 50 in Mayi for
contracts. example, why not sell the com
When the farmer delivers (or a t $4.50, and then make good
elects to set price of the com on ddi c mA
previously dehvered), the ele- in December
vatorbuys back the futures con- 1996 ' js
tract, thereby completing the v
hedge. The futures position
protects the elevator against
price declines after the forward
contract has been made, and
losses resulting from price
declines in the cash market ate
offset by gains from the futures
position.
Under the HTA contract,
however, the farmer can deliver
the com anytime. That is, deliv
ery date is not specified. Appa
rently many people, including
many farmers and some con
tractors, even interpreted the
contract to mean they could
decide to forego delivery of old
crop com in, for instance, June
and make delivery instead of
’96 crop com in December.
So what happened? As the
com price went up, more and
more farmers forward con-
John R. Brake
Department of
Agriculture, Resource,
And Managerial
Economics
New York
State College Of
Agriculture And
Life Sciences
Cornell
In these times of the highest
com prices in years if not
ever com producers and
country elevators should be
prosperous and happy. Right?
Wrong.
It seems that a number of
grain merchandisers, many in
the upper Midwest and a few in
Ohio and other areas, have been
offering a “flexible” hedging
contract, described as a Hedge-
To-Arrive (HTA) contract, as a
marketing tool to attract
farmers.
With the strong upward
move in com prices, the con
tracts have gone sour. A num
ber of fanners have threatened
not to honor the contracts,
many elevators have lost big
money, and there, is potential
for some of the elevators to go
bankrupt, peihaps with signif
icant losses to their lenders as
well.
Elevators commonly con-
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grown on rotation on at least
some of the acres on the farm.
In practice, rotations often vary
in length from three to more
than five years in each crop.
A new Penn State study I am
HEAVIEST
TEST
WEIGHT
heaviest test weight in
corn demo plots-Lebanon,
PA: 59 lbs, Oley, PA; 58 lbs
(1995)
140.8 bu/acre (2nd place),
Pleasant Gap, PA, corn
demo plot (1995)
conducting in cooperation with
an ag economist. Dr. Jay Har
per and an entomologist, Dr.
Art Hower, will focus deter
mining the best com alfalfa
rotation on dairy farms in the
state.
The initial phase of this pro
ject will be to evaluate the rota
tions using yield information
from ongoing crop rotation stu
dies at Rockspring and recom
mended practices based on the
Agronomy Guide. We have
found that shorter, 3-year rota
tions offer many advantages
such as higher com yields,
higher bay yields, reduced need
for soil insecticides on com,
reduced potash needs on alfal
fa, and more potential to take
Some
More importantly, if the ele
vator hedges using current
crop, July for example, and the
farmer doesn’t deliver the com
until December, the spread
between July and December
futures (old versus new crop)
tends to widen substantially in a
rapidly rising market. The ele
vator might sell a July futures
contract and then have to “roll it
over” to a December contract.
The catch is that the July con
tract may have risen $1.50
while the December contract
only rose $.75. In rolling it over
the elevator loses $.75 per
bushel.
Apparently, no one ever
envisioned 1996 market condi
tions when the HTA marketing
strategy was developed.
Ist1 st place
fe. GRAIN &
M | SILAGE
ft IYELDER
Corn Taik, Lancaster Frmlng7&urday,"S&fter 1$
advantage of no-till com.
Compared to a four-year
rotation, for example. 100 few
er pounds of insecticide and
4,600 fewer pounds of nitrogen
fertilizer would be needed on a
300-acre farm per year because
of a greater percentage of the
com would follow alfalfa,
where N fertilizer recommen
dations are low and soil insec
tides are not needed. Likewise,
with no fourth year alfalfa
fields, potash requirements
would be reduced by 4,400
pounds on the farm since these
fields frequently have high
requirements for K. These
fields may also have slightly
lower yields than second or
third year fields.
The downside of the three
year rotation is that hay fields
need to be reseeded more fre
quently and some nice three
year-old alfalfa fields need to
get killed to rotate to com.
We are in the process of
determining the best way to
estimate the whole farm profi
tability of these various rota
tions to find the conditions that
the shorter rotations make the
most sense.
The next phase of this project
has been to work with two
working dairy farms and evalu
ate the potential of various rota
tions on their system. Adding
real-world considerations to the
project made it more complex.
For example, both farms we
selected indicated they liked
the three- to four-year rotations,
but they also like to harvest a
first cutting of hay before they
rotate a hay field to com. Based
Pa.
HARRISBURG —Based on
Sept. 1 conditions, Pennsylva
nia’s 1996 production of com
for grain is expected to be high
er than last year, according to
the Pennsylvania Agricultural
Statistics Service.
Yield of com for grain is
expected to be a record 123
bushels, up 27 bushels from last
year, up three bushels from the
August 1, 1996 forecast, and
three bushels more than the pre
vious record yield of 1994.
• 34.4 tons/acre (Ist place),
Lmwood, NY, silage trials (1995)
• 190 9 bu/acre (Ist place), Phelps,
NY, corn yield test plot (1995)
• fast dry down
Corn Production Higher
on this input, we added another
rotation to our project for
consideration.
Some of our preliminary pro
fitability estimates indicate that
indeed this double crop hay/
com rotation might be the most
profitable alternative, provided
that the hay can be harvested
early, and the com yields at
least 75 percent of a normal
crop. To do this, however,
requires good soils, adequate
labor, good management, and a
long season. Otherwise the
double crop rotation can be
costly.
Based on this and other con
versations with the producers,
we realized we need some actu
al hay and com yield data to
carefully estmate the econom
ics on these rotations under pro
duction situations. This year we
have been measuring yields and
monitoring pest problems such
as western com rootworm and
clover root curculio, an alfalfa
pest that causes stand decline in
third and fourth year alfalfa.
Our inital findings seem to
indicate that short rotations
probably do have a place on
dairy farms in Pennsylvania,
but we need to identify the con
ditions where they fit best.
These conditions will include
the pest levels on the fatm, the
amount of manure available,
the yields of com and alfalfa
during each year, and the feed
needs of the farms. Commodity
prices and conservation
requirements will also have
some effect. We also need bet
ter software to compare com
plex whole farm economics of
the various rotations.
Acreage for harvest is esti
mated at 1,050,000. Production
is expected to be 129.2 million
bushels, 37 percent more than
last year.
At the United States’ level,
com for grain production is
forecast at 8.80 billion bushels.
19 percent above the 1995 crop.
Acreage for harvest is expected
to be 73.3 million acres. The
yield is forecast at 120.2
bushels per acre, up 1.5 bushels
from last month and up 6.7
bushels from last year.
TOP
% ,™
154 0 bu/acre (Ist
place), Hershey, PA,
corn demo plot (1995)
172 7 bu/acre (2nd
place), Johnsonville
Reading Bone corn test
plot-topped Pioneer
3295 by 14+ bu/acre
(1995)