A decision is simply the act of making up your mind. As easy as it sounds, we all know it isn’t, and certainly nothing is more agonizing than trying to second-guess a volatile commodity market. Selling at the best price possible is often more luck than skill.
To make the most of selling decisions, you have to be able to measure your decision.
There are also more pricing alternatives offered to grain growers today than ever before, which can add to the confusion. The combination of your skill and these tools can help you push average net returns higher. But how do you know if that is actually happening? And how do you know which combination is best? Should you store on-farm, or lock an attractive basis or enter a deferred pricing contract? Should you hedge, defer delivery, sign a floor price contract, buy call options, buy put options or simply deliver and price?
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Start by establishing your goals and objectives. In other words, set up a pricing plan. A pricing plan is your written statement of overall marketing goals. For example, if you want your hedging program to increase your sale price by 10 per cent, jot it down on a piece of paper with a specific price objective in mind. Another objective might be to spread pricing over at least four different periods.
Unless you have specific goals in mind, it is difficult for a selling plan to be successful. The key to selling is planning, whether you use commodity futures or not.
Now, let’s work through the decision process, using a series of questions as our guide.
Do you sell grain now or wait? For most grain producers, the process begins and ends here. Lack of marketing knowledge puts the entire load of their marketing program on one big decision — to sell or not to sell. To decide whether to sell, start by looking at the fundamentals, i.e. the supply and demand factors affecting the current market. Talk with a market analyst. Surround yourself with a network of market opinion.
Be aware, however, that although fundamentals are important, they are only part of the insight you need to make a pricing decision.
Watch commodity charts for clues to price direction. 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 valuable market tools. Getting a commodity broker on your marketing team adds a powerful source of market information. So the first step whether to sell or wait is basically a market outlook decision.
Assume for now that you’ve made a decision to sell a portion of your crop. Let’s look at the next step.
Should you sell on the cash or futures market? Grain producers who understand basis make extra profit. You’ve made the decision to sell some crop in the bin. Now you have an option. So you sell to the local buyer or should you hedge by selling a futures contract? 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 after the harvest selling pressure. Basis narrows. 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.
The decision to sell on the cash or futures market is simply a basis decision. If the basis is weak and wide, hedge by selling the futures. Don’t deliver. Once the basis narrows later in the winter, deliver and buy back your hedge. The amount the basis improves during the life of your hedge is just more money in your pocket.
Now, how much should you forward price? Here are some rule-of-thumb suggestions. How much to pre-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 is an active new-crop hedging period. Experienced marketers may hedge up to one-third of their new-crop production before it is planted. Once the crop is in the field and closer to harvest, they may pre-price up to 50 per cent of expected new-crop production. The key — whether you’re forward pricing new crop or selling old crop — is to market in small quantities. This gives you more marketing flexibility and extra control to sell into the top third of average yearly prices.
Should you sell today or defer delivery? This isn’t an easy question, but 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 grain the extra time in relation to today’s return.
Remember to check several markets. There is often a buyer anxious to purchase grain to meet a particular sale. It isn’t 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 would be willing to pay an extra five to 10 cents to get all your barley. Your bargaining ability comes into play here.
Most believe that the difference in marketing is simply one of being a good judge of market outlook. Being able to pick the top price would be very helpful, but it’s unrealistic to expect. Understanding basis, carrying charges and hedging, plus shopping the market and planning your sales all contribute to the end result, the profit. The key is to have a good working knowledge of your entire delivery and pricing options and be well connected to market analysis and trends.
Errol Anderson is the author of ProMarket Wire (a daily farm risk management report) and a commodity broker located in Calgary. He can be reached at 403-275-5555. Email: [email protected].
