Which marketing tools are right for you? There’s no one answer, the pros say. Instead, it all depends on your objectives plus your cash flow needs and your debt-to-equity position.
For example, if it’s critical to protect a price level in order to pay off an operating line, then your best choice may be to lock in a portion of your crop at a break-even futures price, says Al Mussell, senior research associate at the George Morris Centre. “It’s an insurance against your margin.”
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However, if you’re in a higher equity position, you may want to buy a call option on the same crop to keep the door open to upswings in market price. “Hedge a proportion during the growing season depending on how the crop is progressing, or for corn you might make gains timing around U. S. farm program announcement,” says Mussell. “Once the crop is in the bin you can hedge it all.”
However, Frank Backx from Hensall Co-op urges caution. He recommends flat price sales only. “Don’t try to get too cute, it only complicates the job,” Backx says. “Targetprice selling and deferred shipment sales should be the only tools needed.”
Backx works with a couple of farmers who sold up to 80 per cent of their crop insurance yields a year ago and sold two to three crop years. For wheat, in particular, they locked in at about $7 per bushel for the crop they’ll harvest next year and the year after. It’s a price most farmers can only dream about now.
Backx doesn’t recommend speculating on the futures market. Simply put, he doesn’t know anyone who has had long-term success at this. “It’s like people who go to the racetrack or casino,” Backx says. “The more you go there, the poorer you will be.”
“Hit singles all day long”
For canola and peas, Motiuk contacts companies and pre-sells at a fixed price for a set delivery date.
“Pricing opportunities come and go,” says Motiuk. “With canola, you balance it over the market but peas you have to be careful.” He’s referring to the lack of a futures market and pea buyers.
The remainder of the crop he sells during the fall and winter, looking for upsides to the market. He tries to sell all the peas and canola before seeding the next crop.
Since Motiuk is in a stronger equity position, he can cover his cash flow needs early and then try to capture some of the upside of the market for the rest of the crop year. It’s a more conservative approach but at this point he’s got more to lose.
“I don’t have to swing for the fence anymore,” says Motiuk. “I just hit singles all day long.”
The change in his business and personal goals has affected how he goes to market too. When he was younger and building the farm, he was a more aggressive marketer. He also used producer cars. By doing his own loading and shipping, he traded his time for cheaper rates. He no longer loads producer cars, but still believes in them. “They’re a great option,” he says.
Starting with cash markets
Even though it’s tempting to speculate, using futures should be no different than locking in a cash price, Lepp says.
Lepp’s basic strategy locks in a proportion of each crop yet keeps the flexibility to sell on cash markets. In the last year, the Lepps have done mostly cash sales, and Lepp says he’s taking on more cash market risk due to volatility in the market.
In the past, Lepp has bought and sold futures contracts, if basis levels are poor at the time. “But I’m always careful just to hedge what we produce,” he says.
Underpinning it all is a commitment to keep up to date. Lepp has an agricultural business degree from the University of Manitoba. “We try to take as many seminars on marketing as possible,” he says.
