Pacer Prime Grain Contract Helps Farmers Capture Crucial Window

Friday, January 30, 2015

Please Note: The sign-up period for the Pacer Prime grain contract ended Friday, February 20th, 2015. For help with other Pacer contracts, please speak with your Cargill Farm Marketer.

As a farmer today, you’re faced with relentless financial pressures, and spring is rife with them: Income tax and land payments come due just when you’re buying inputs and insurance for the new year. Usually your farm program payments and crop sales help ease the burden.

This year, though, is different. Your 2014 government payment is still uncertain under new rules that tie payment to average prices, and much of the record harvest in your bins still face a queasy market. The grain marketing decisions you make between now and June have never been so large in their impact—and yet so complex.

“Marketing decisions used to be more independent, but now input and insurance tend to move alongside the market,” says Nate Brabec, a strategic marketing specialist with Cargill. “There’s a bigger tie between selling your grain and other payments and expenses, so you don’t want to handle them separately.”

Risk premium poses a unique opportunity.

Fortunately, on the marketing front, some good months could be on the horizon. Spring is historically the best time to sell. Prices are typically higher at this time of year than at harvest, when the market is comfortable with the size of the crop —a trend borne out for most of the last decade.

And this spring, unusual market forces could create even better conditions. Despite a recent setback in prices as financial and commodity investors curbed their risk positions, market fundamentals support the potential for a modest price improvement this spring, at least temporarily.

The potential stems from crop reports. For the first time ever, the USDA revised a two-year-old estimate, chopping 2013 corn carryout by 1.9 million bushels. Paired with a reduction of 192 million bushels in 2014-15 corn production, the news creates the potential for upward movement known as “risk premium.”

Because of the recent pull back in prices, there is probably little risk built into the market today. But any meaningful return of investment fund money, weather issues in South America, interruptions in U.S. planting progress, or other unforeseen events could easily bring risk premium back into the market. The advantage may fade again as the new crop year solidifies, creating a brief window of opportunity.
 
“The potential risk premium is due to possibly tighter supplies and weather unknowns, and it means higher prices,” says Brabec. “But every day, you could argue that risk premium is taken out—once crops are planted and we approach June when the 2015 crop outlook takes shape.”

An instrument to strike.

To help capture this unusual opportunity, Cargill is offering a variation of its popular Pacer contract. Called Pacer Prime, the contract trades from February 23 through June 26, 2015—the projected duration of the risk premium and spring rally.

Under Pacer Prime, you commit a portion of your bushels by the sign-up deadline of February 20, and leave those bushels in the market through June 26. You’re guaranteed the average of the daily close over that period—a period that historically delivers seasonal market highs.

“Picking one day to sell is very tough and emotional. ‘What if I’m wrong?’ the farmer worries,” says Brabec. “The nice thing about Pacer Prime is you can make a gradual sale. You don’t have to pick the day to price your grain. You can participate every day during a historically strong time and get the average price in that period.”

Easy, transparent, and diversified.

In essence, the contract trades a portion of your bushels each day at the daily closing price—a simple way to spread risk and build diversification into your grain marketing strategy. The daily close is also an easy performance metric to track online.

“A farmer can check what the closing price is each day, add them all up and divide by the number of contract days to calculate the average,” says Brabec. “They can monitor the performance of their contract either manually or by viewing their contract positions on CargillAg.com. It’s very transparent and simple.”

And there’s an exit ramp. If you change your mind about participating—or reach a price you want to lock in—you may price out your remaining bushels at any time at the current price.

“Most farmers already want a big portion of their grain sold by June, and if they’re hauling a big chunk of it in February or March, they’ll need to price it,” says Brabec. “With Pacer Prime, we’re picking the best window to take advantage of the market.”

The power of above-average average.

We get it. The word average may not inspire emotionally. But it can be a game changer economically—and that’s what grain marketing is all about: removing emotion, having a plan, and doing what makes sense for your margins.

“Studies show we’re not as good at timing the markets as we think we are,” says Brabec, whose family still runs a grain and cattle farm in Nebraska. “With grain marketing, we’ve proven that a seasonal time frame to run the average can really be powerful.”

How powerful? Over the same contract period last year, Pacer Prime’s average price would have been $4.72 per bushel—beating the harvest average by $1.22 per bushel. Historically, the contract would have beaten the harvest average in seven out of the last 10 years. There's nothing average about a 70 percent success rate.  

“Once they’ve bought inputs and insurance, farmers have a chance to sell at what is historically a price that makes a lot of sense,” says Brabec. “We can’t pick the highs, so why not get the market average during a time that’s validated to be higher?”

If Pacer Prime sounds right for your operation, don't delay. The sign-up deadline for Pacer Prime is Friday, February 20. Contact your local Cargill Farm Marketer to learn more today.

Advantages of Pacer Prime

  • Capture the market average during a historically strong seasonal time frame
  • Spread your risk over daily closing prices between February 23 to June 26, 2015
  • Price out any time during averaging period
  • Add discipline to your marketing plan
  • Automatic execution reduces marketing stress, frustration and risk
  • Minimal investment required

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