Keeping a lookout for new-crop pricing opportunities makes you more money in the long run. Locking in profits well ahead of the drill or planter can increase your odds of pricing success. For many grain marketers as well, pricing ahead of spring seeding ensures that grain shipped off the combine next fall is sold profitably. Plus, by starting early with your new-crop pricing program, you also buy extra time to pick your pricing points, and profitably pre-priced grain acts as a great antidote for those fall cash flow needs.
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But there are potential risks too, so it’s important to always begin your marketing program gradually. You just never know when weather, insects and disease can derail even the best thought-out grain production goals and reduce quality.
Here are two rules of thumb for your pricing program. Try to not forward price more than 30 per cent of your expected grain production prior to spring seeding operations, or more than 50 per cent ahead of the combine.
Again this extended pricing window allows post-harvest bill payments and overall cash flow needs to be met with profitable grain sales.
To increase your success at locking in profitable prices, the entire marketing calendar needs to be turned ahead a few months. For example, let’s say you do lock in half of your new crop (i. e. 2010 harvest) grain production profitably by the time the combine needs to be greased. In theory, you would have still half your grain production yet to be marketed over the following few months and into 2011.
But once harvest is complete, it’s already time to start looking toward your 2011 crop. This means you are still marketing old crop, but you always have an eye toward new-crop pricing opportunities as well.
Marketers who continually scout for new-crop grain profits reduce their chance of being forced to price grain for cash flow reasons. Marketing grain due to cash pressures can also be called “marketing by default.” It forces your hand, and forced cash flow selling can easily push your grain price return into the bottom third of average yearly prices.
PRE-PRICING TOOLS
What tools should you use to help lock in those long-term pricing opportunities? Well, there are a variety of pricing alternatives that can be used as part of your forward pricing program. The goal is to capture profits as they appear.
Here are some suggested steps to take when considering whether to forward price grains and oilseeds in the weeks ahead.
contracts (DDCs) gradually with your local buyers is considered the first step. You may set your pricing targets directly with your buyer. By starting new-crop pricing using DDC cash contracts, there is no need to provide upfront margin money as is the case if you sell the futures directly through a commodity broker. But don’t aggressively sign DDC contracts. Inability to provide grain or proper quality to meet contract specifications could produce financial hardship plus trigger cash contract payout penalties after harvest. Remember, payout penalties due to a lack of delivery or poor quality can take a financial toll.
Use DDCs up to your personal grain production comfort level, but it is worth discussing with your buyer what the potential price discounts would be for off-grade delivery. Ask your buyer if #2 and #3 grade discounts could be listed on the DDC contract at the time of signing. You just never know when weather may hit hard. Grain marketers may pre-price between 10 to 50 per cent of expected harvest production using these cash contracts.
comfort level signing cash DDC contracts. Let’s say drought ignites grain and oilseed bids. In this circumstance, a commodity trading account may come in handy. It is time to scale in “put options” into your pricing portfolio. Put options are essentially price insurance policies. “Puts” effectively guard against price spills.
Consider gradually scaling in “puts” when weather problems drive futures prices higher. The advantage of this marketing tool is twofold. First, put options don’t commit growers to grain delivery. Plus, there is no risk of margin call. These are two key, stress-relieving advantages of put options. Marketers can aggressively add put options to their risk management portfolio without excessive delivery or financial risk. In fact, up to 100 per cent of your expected production could be guarded with this tool. There is no payout penalty risk associated with this tool.
price “hedge” also doesn’t commit growers to physical grain delivery. But margin call risk is highest during the growing season. If you plan to utilize futures as a part of your pricing program, always be prepared for margin calls. They are a fact of life for the commodity trader. They’re inevitable. It is also advisable to plant protective “buy stops” above chart resistance to avoid taking a nasty futures loss should weather spikes see grain prices trading sharply higher. Ask a chart analyst or commodity broker to help you pick a level for this price protection.
Forward pricing using cash contracts, scaling in put options and selling or shorting futures as a protective hedge are all tools to lock profitable grain and oilseed prices ahead of the combine and even the air seeder. Each one of these market tools has its own distinct benefit and use in an effective grain-pricing program.
It is this mix of pricing tools that can strengthen your hand as a farm marketer and improve your farm’s balance sheet. CG
Errol Anderson is located in Calgary. He is author of “ProMarket Wire,” a daily risk management report. He can be reached at (403) 275-5555. Email:[email protected].
