Get your grain marketing house in order
7 tips to start the new year right
This year is concluding with some interesting trends in futures prices mixed with concern over wide cash basis prices. Our grain risk managers at Cargill offer these seven tips for getting your grain marketing house in order for 2021.
1. Know what your true break-even levels are (cost of production). Remember to include those costs that are often overlooked, like equipment payments, taxes, and even your time. Do you estimate your cost of production? Being off by just a few cents in tight markets can be the difference in breaking even or making a profit. Use those cost-of-production numbers to determine your price targets. Although optimism is a necessity in this business, be realistic with price targets.
Create a plan to sell into the carry when necessary to achieve your goals. (Carry is the difference between the current price and the price you may get six to 12 months from now.) Holding on to grain until those six to 12 months come around typically results in lower prices for you. For instance, March MGE wheat is US$5.45, whereas the July contract is US$5.65. If you sell wheat now on those July numbers (or sell into the carry) you guarantee that US$5.65 price. If you wait until July to make the sale, history shows that prices fall as they approach the spot market, and you may only receive $5.45 for your grain by then. Take advantage of what the market is giving you now to lock in suitable prices in the near future.
2. Estimate profitability projections for the coming year and use the appropriate pricing tool to achieve your goals. When projecting profits, evaluate the most profitable crop rotation and yields. Establish a delivery schedule for the winter and spring months that matches your cash flow needs.
3. Understand your risk tolerance. Risk tolerance is about your willingness and ability to assume risk. It comes down to your capacity to stomach swings in the market (volatility), your cash flow needs, as well as the tools you use to execute based on your grain marketing plan. There are different tools available with varying levels of complexity and risk. We recommend consulting with your MarketSense Advisor to gain a firm understanding of how a particular tool or strategy works before taking a position.
4. Use target offers to trigger action. Target offers can help to trigger action and keep you accountable based on your grain marketing plan. Offers should be based on your profit targets. Even if you only sell one truckload at a certain price level, it can work as a reminder to take additional action in the weeks or months ahead. Once you establish a futures or basis offer, do not lift it. If the market moves, look at selling more grain in the deferred months.
5. Understand the grain flow and demands in your area. Grain marketing is cyclical, which means historical data can help to show when basis levels typically drop in your area. Work with your local advisor to understand the market highs and lows, and use the data to help you establish basis at those key times.
6. Establish a delivery schedule that fits your operation and stick with it. Too often, delivery times are delayed in hopes of a last-minute market rally. For example, many farmers deliver the bulk of their bin bushels in August and September, when prices are historically low. Aside from capturing the worst basis of the year, holding grain that long can create storage risk.
|A rule of thumb: Determine the number of bushels you want to take into the summer months unpriced to sell during a potential weather rally. Would it be better to hold a price enhancement contract than physical grain?|
7. As grain marketing plans begin to take shape, revisit the long-term goals for your farm. Are you looking to expand? Is a succession in the near future? Will you be investing in new technology? Goal planning should not just be done year to year. Developing a three- to five-year plan can help you lay a foundation for long-term success. Finally, consider investing in a MarketSense advisor. These are people who follow the markets and give marketing advice for a living. Marketing grain successfully takes time and commitment.
Disclaimer: The opinions and projections contained herein are those of Cargill Limited as of the date of this publication and may change without notice. Cargill Limited accepts no liability for any loss arising out of any use of or reliance on this publication or its contents.