When Average is Above Average

I have had great intentions to launch a “seasonal averaging contract” program for our grain customers.  Typically, an averaging contract is simply an automated agreement between a grain producer and grain buyer to sell a pre-determined volume of grain at regular intervals over a period of time to try and achieve a price equal to the average price during the period.  Various grain companies use fancy names to make their seasonal averaging programs sound cool or more technical (Pacer, ASP, AutoHedge, Index Pro), but they’re all pretty much the same.  After all, in the immortal words of Dr. King: “It ain’t rocket surgery…”  The main differences between programs are: A) the date selling commences, B) the date selling is completed, and C) the “terms and conditions”.

The rationale of selling grain via a seasonal average is very compelling: since 1983, a selling with a simple seasonal average was either about the same as, or much better than selling at harvest time in 30 of the 36 years (83% success!).  Related image

It works because us farmers are pretty predictable folks.  Nearly every year we find a reason to avoid selling enough grain in the spring to satisfy the market, so prices go higher until the “big money guys” are confident the crop will pan out, and they sell the bejeezus out of it until harvest…when we puke a bunch of corn to avoid paying storage.  If you’re a farmer and you don’t think you’re predictable, let’s meet at the mini mart tomorrow morning at 5:45 to discuss it…that’s right, I know you’ll be there…

You can clearly see these tendencies, along with the old-school hope/greed/fear/vomit marketing cycle in new-crop seasonal price curves for corn and beans:

CornSeasonal

SoySeasonal.png

Image result for above average meme

While I’ve had great intentions to launch a Cogdill Farm Supply averaging contract, I never really got beyond intentions for two reasons: A) a new-crop averaging contract program needs to be ready to go by March, and everyone knows I’m exceedingly lazy in FEB, and B) after dragging my feet too long and failing to launch an averaging program before the onset of a spring rally (see “A”), each year I begin to believe that “this year is different, and the averaging program won’t work.”  So I would just skip it…only to see by harvest time that an averaging program would have really worked great.

Well, thanks to the crummy weather this winter, I managed to overcome my sloth, and I am officially launching a Cogdill Farm Supply Averaging Contract!  As mentioned above, about the only ways to make an averaging contract unique or better than the other guy’s is to pick better start/stop dates.  After a tremendous amount of procrastination, I wrote a Matlab computer program to help me “optimize” the start/stop dates for our program, and I’ve decided on the following dates for this year’s averaging contracts (highlighted in the green bars on the seasonal charts above):

Corn Averaging Contract: Begin selling April 8th, Finish June 14th*

Soybean Averaging Contract: Begin selling April 29th, Finish June 28th*

Producers may elect to commit bushels to the seasonal averaging programs up until the Friday before the first sell date (Corn = April 5th, Beans = April 26th).

We kept our minimum volume commitment small so the program will be accessible to operations of all sizes: you must commit at least 1,000 bushels of corn, or 500 bushels of beans to participate.

Over the past 5, 10, 15, and 20-year periods, averaging corn prices over those dates would have beat the harvest price by 9-18%, or about $0.34-$0.68/bushel…on average.  Over the same trial periods, the soybean averaging contract would have beat the harvest price by 5-13%, or about $0.48-$1.24/bushel…on average.  Will those dates actually turn out to be any better than the start/stop dates for other averaging contracts? I dunno; ask me in August…

* The sales will all be made on Thursdays at the close; corn will be sold using DEC’19 futures, and soybeans using NOV’19.  Why Thursday?  Why not?  The “experts” always say there’s no difference between which days of the week you sell.  However, some friends tipped me off to their tests, which showed a cumulative advantage of 3-8¢ over the course of the averaging period for Thursday sales compared to all other days (when part of a seasonal averaging program).  Sounds good to me…

And now for a word about fees…

While most seasonal averaging programs require a fee to participate, typically about a nickel per bushel, the Cogdill Farm Supply Seasonal Averaging Contract is FREE!

  • If you choose to “CASH PRICE AVERAGE” (i.e. basis gets averaged along with the futures), we won’t charge you a darned thing.  After all, your participation in the program makes my life easier, so why should I charge for that ? *
    • * But I’m not paying you to participate…
  • If you choose to “FUTURES ONLY AVERAGE” (i.e. same as HTA contract)
    • There will be a 3-cent HTA fee, the same as would apply without averaging
    • 2-cent roll fee (one roll to deferred futures allowed)
    • Flex delivery HTA is available for an additional fee
  • ACCELERATED PRICING/EARLY STOP: At any time, you may choose to price out the unpriced portion of the contracted bushels, or stop pricing early (i.e. without pricing all bushels).  A 3-cent fee will be applied to all bushels priced priced early or left unpriced.
  • You may pair either the CASH or HTA averaging contracts with a minimum price strategy to set a floor price, while keeping the ability to participate in a rally after the averaging period has ended.

Warning!!!

While averaging contracts are good about 80% of the time, the other 20% of the time they can blow up in your face like an M-80 with a punk fuse.  I consider the years where averaging contracts fail to be “Counter-Cyclical” price years, and they most often occur because of drought/late-heat.  In the case of corn, there were 6 years since 1983 when a seasonal averaging contract generated a price considerably lower than the harvest price: 1983 -$0.59, 1988 -$0.55, 1995 -$0.42, 2002 -$0.35, 2010 -$1.05, and 2012 -$2.23!

AntiCornChart

In the case of soybeans, there were 7 counter-cyclical years: 1983 -$2.12, 1995 -$0.35, 2002 -$0.68, 2003 -$1.22, 2007 -$1.21, 2010 -$1.38, and 2012 -$2.18.  So what to do now?

While I believe a seasonal averaging contract is a good way to market a portion of your production, I think it’s important to be aware that counter-cyclical years will happen, so: 1) DON’T PUT TOO MANY BUSHELS ON AN AVERAGING CONTRACT!, and 2) you might consider combining the averaging contract with a Minimum Price Contract, which allows you to purchase the right to re-price higher if the market rallies after making sales.

2 thoughts on “When Average is Above Average

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