by John Ohman
Marketing consultants most often make grain sales recommendations based on levels to sell X percent of your crop. For your 2026 production, that means looking at what percent to sell at harvest vs. what percent to store into 2027. Nowhere in this type of marketing scenario do you know what your revenue may be.
What if instead of looking at bushels, you marketed from a revenue perspective? Let’s instead consider the grain revenue management process, which focuses on a mark-to-market value analysis of your crop production.
Mark-to-market allows for measuring the fair value of anticipated crop production at current market prices. Understanding MTM is essential for accurate valuation in investment management, risk management and individual investing. It’s a tool to assist in risk management. It’s also a tool to help manage future income once the combine shuts down and grain is sold or stored until sold.
How MTM works for corn producers
Using corn as an example, here’s the five-step process:
1. Benchmark market price. Recognize that markets change based on December corn futures.
2. Estimate current crop value. Use MTM analysis to estimate the value of your crop at current market prices. The assumption? If the market stays right where it is from now until the last kernel is sold, what is your revenue?
We can build an example using numbers from the University of Minnesota Southern Corn Budget for 2026 for 1,500 acres planted and a 200-bushel-per-acre yield average, based on the example farm’s actual production history. Per-acre expenses are set at $858.
We sure wish managing risk was limited to building a floor in profits. Unfortunately, in many cases today, that simply is not the case. If your individual numbers are different than the U of M, great. However, the risk management analysis does not change. The question is how much you are willing to give back if prices worsen.
3. Ask two questions. With the analysis in place, questions and answers become quite simple:
Estimate revenue opportunity. Using $4.62 as the current market price and 200 bpa as the yield, the loss is estimated at $111,750. Whether you like this, that is the reality. Now what?
Perform price shock analysis. For every 25-cent erosion in price, your loss increases by $75,000. The next question is not what you believe the market will do. The question is whether you can live with this price should it happen: Yes or no? If the answer is yes, you have just made your risk management decision, which borders on speculation. If the answer is no, that is when risk management analysis starts.
4. Price bushels to manage risk. The primary tools used by most corn producers are cash forwards at their local elevator and hedge-to-arrive contracts. From an analytic perspective, these two tools simply neutralize a percentage of your anticipated production to any market movement. The revenue component of these contracts is fixed and can be built into the price shock analysis. What can be done for the unpriced bushels?
5. Manage unpriced bushels. Consider options. When the topic of options comes up, many farmers report they used them once and lost money. The primary reason is they made the buy without understanding the potential impact to the underlying revenue picture.
Back to our example: Determine the maximum loss you’re willing to accept. For this example, we’ll set that at $200,000. To mitigate risk to this level, look at the impact of adding put options with three different strike prices.
How about a hedge?
Through modeling, we can analyze the impact of these hedges to your revenue.
Putting analytics into simple words:
- Should the market drop to $4.12 futures on Nov. 15, your projected loss would be $200,055 vs. the unhedged loss of $261,750. Not great but within the $200,000 target. The impact to revenue is not only a function of price shock analysis but also timing when the price target may be hit.
- We can also compare estimated option value on Nov. 15 against Sept. 15. Changes in option premium values are based on time to expiration. Nov. 15 is right at expiration so there is little to no time value left. Thus at $4.12 on Sept. 15, the model suggests that an additional $13,000 of time premium is left in the options.
At this stage, let’s ask some questions:
Do you have to hold options until expiration? No. The options are placed to mitigate risk based on the market at the time of the initial trade date. Markets typically move, we just do not know the direction or time. As time marches on, MTM valuation analyzes changes in revenue in regard to the options prospects and decides to maintain, roll up, roll down or roll out an option hedge.
What if you do not have the cash to “pay” for the options? Ideally, the bank carrying your operating loan may provide a marketing line of credit. It is in the bank’s best interests to have a better understanding of your potential revenue flow. Check with your banker if they offer a marketing line and the restrictions around them.
How can you be sure that cash going into and out of your hedge account is accurately reflected in your revenue picture? Each option hedge should be reconciled to the crop year and crop type in overall MTM reporting. This is then reconciled to your option or futures hedge account with statements submitted by your futures commission merchant.
How are options treated in your financial statements? There may be a difference in how option positions are treated for tax purposes vs. revenue risk management (cash vs. accrual). MTM reports generate revenue numbers based on the accrual of the option asset.
Fundamental change
The concepts and applications for managing revenue with a mark-to-market system are well beyond standard grain marketing. Implementing a revenue management process is a fundamental change in old-school grain marketing that the farmer will use for every crop year in the future.
Ohman, Heartland Commodities & Securities, can be contacted by phone at 320-761-0406 or email at john@heartlandcom.com.
Disclaimer: Trading in futures products entails significant risks of loss which must be understood prior to trading and may not be appropriate for all investors. Please contact your account representative for more information on these risks. Past performance of actual trades or strategies cited herein is not necessarily indicative of future performance.