Many People Believe That The Difference Between Being A Good Or A Poor Marketer Is Simply One Of Being A Good Judge Of Market Outlook. I’m Not One Of Them
There are times when a cash contract is the best alternative, and there are times the use of a commodity trading account is the best marketing choice. How do you know when to consider either cash or futures contracts?
An effective farm pricing plan usually involves a mixture of cash contracts with the added horsepower of a commodity trading account. (Local buyers have done an excellent job of providing several cash contracting alternatives and some contracts closely mimic the use of a commodity trading account.)
Read Also
Riding the tariff rollercoaster
Farmers are accustomed to roller-coaster years. But the current geopolitical windstorm is something else entirely. On his cattle operation near…
There are signals within the marketplace that help indicate which strategy to use. But before getting into which market tool to use, you need to set market goals. Here’s an example of the kind of goals which may be realistic heading into the spring market.
Canola Marketing Goals: April 1, 2010 Goal #1: Follow a definite marketing plan Goal #2: Add 15 per cent to my cash price
via hedging or basis gain Goal #3: Spread my decisions over several selling periods
For instance, you may target prices at which you’ll be flat priced or hedged through a broker. You may decide to price 10 per cent of your expected new-crop canola at $8.50/bu., 25 per cent will be priced or hedged at $8.75/bu. and up to 35 per cent priced at $9/bu. prior to seeding.
Now, let’s work through the decision process, using a series of steps as our guide.
Should I sell grain now or wait?
Lack of marketing knowledge puts the entire load of your marketing program on one big decision — to sell or not to sell. But the decision to sell or not starts by looking at the fundamentals. In other words, how do the current supply and demand factors affect the market?
Talk with a market analyst. Surround yourself with a network of market opinion. The analyst views the market globally. Buyer opinion covers the local market.
Although fundamentals are important, however, keep in mind that they are only part of the answer you need to make a pricing decision.
Watching commodity charts also gives clues to price direction. It’s important to respect the price trend of the market. For instance, if barley prices are in an up-trend, it may be worth waiting to see if the rally continues. Lines of support and resistance drawn on commodity charts by technical analysts are powerful tools. Using a commodity broker can add a powerful source of information for a pricing decision.
So, let’s assume that you decide to sell a portion of your crop. Now we need to look at the next step.
Should I sell on the cash or futures market?
Farmers who understand basis make extra profit here. You’ve made the decision to sell some crop in the bin. Now you have an option. Should you sell to the local buyer or sell a futures contract (hedge) directly through a commodity broker. Since cash markets run in close parallel to futures markets, a sell signal on the futures usually means sell on the cash market.
Scout around your local elevators and find out what the normal basis is for each crop in your area. Grain buyer competition often heats up after the harvest selling pressure, meaning the basis will narrow. If local basis bids are attractive, this is a signal to consider delivering on the cash market. If basis bids are wide, this is a signal to sell the futures or purchase put options to guard price downside.
The decision to sell on the cash or futures market is simply a basis decision. If the basis is weak and wide, hedge. Don’t deliver. Once the basis narrows later in the winter, deliver the physical grain and buy back your hedge with your broker. Remember, the amount the basis narrows during the life of your hedge improves the bottom line. A narrowing basis will simply funnel more cash into your pocket.
So how much should I forward price?
Here are some rule-of-thumb suggestions. How much to forward price depends largely upon your farm’s financial health. Those in a low equity position are
much more likely to forward contract and hedge more aggressively to ensure a profit.
Late winter and early spring are active new-crop hedging periods. Experienced marketers may hedge up to one-third of their expected new-crop production before it is planted. Once the crop is in the ground and they get closer to harvest, they may preprice up to 50 per cent of expected new-crop production.
The key when forward pricing new crop or selling old crop is to price in small quantities. You may decide to sell grain in 10 per cent lots. This gives you more marketing flexibility and extra control to sell into the top third of average yearly prices.
Should I sell today or defer delivery?
Selling grain today or accepting a higher price for a deferred date is an economic decision. You need to figure your cost to carry the additional months in relation to the return.
Check several markets. There is often a buyer anxious to purchase grain to cover a particular sale. It is not uncommon to get 10 to 15 cents more for a bushel of barley because of a local supply problem. Also, it is worth asking if a buyer is willing to pay an extra five to 10 cents to get all your barley. Your bargaining ability comes into play here.
Many people believe that the difference between being a good or a poor marketer is simply one of being a good judge of market outlook. I’m not one of them. Being able to pick the high price is very helpful, but unrealistic.
Instead, it comes down to actual work. Understanding basis, carrying charges, hedging, shopping the market and planning sales all contribute to the end result… profit. The key is to know all your entire delivery and pricing options.
A marketing plan is a road map for selling. It involves the use of cash contracts and the futures market to offer maximum pricing and delivery flexibility. But it takes discipline to make it work. Discipline controls our egos and hones profits even through those leaner grain price years. CG
Errol Anderson is author of the daily farm risk management market report “ProMarket Wire.” He can be contacted at (403) 275-5555 in Calgary or email: [email protected].
