I may be a Cargill grain contracting solutions manager, but above all, I am a farmer. And like most farmers these days, I’m concerned with protecting my margins in today’s volatile markets. In fact, I’ve just calculated our farm’s cost of production for this coming year, and grain margins are extremely thin.
Market volatility has certainly increased over the last five years, and increased exponentially when compared with the past 25-year trend. With such volatility — and I’ve been guilty of this myself in the past — farmers try to time the markets. This is a very difficult thing to do, and it means that important financial decisions tend to be based on emotion.
Many of us are feeling hopeful right now: we hope markets will go up. When markets go up, farmers feel excited and confident. However, when markets start dropping, as they inevitably do, farmers hit the panic button and sell. This is where the theory that most grain is priced in the bottom one-third of the market developed.
Chasing markets can feel like riding an emotional roller coaster. From hope and excitement to fear, regret and panic, the turmoil and increased stress can take its toll on home life. Another example where emotions can get the better of us is the sense of loss we feel if we didn’t hit the top of the market, even if the price is above profit margins.
Use Risk Management Tools
There is another way for farmers to market their grain, and markets can go up or down — and it doesn’t matter.
For example, on our farm, we haul a lot of our canola early off the combine because we don’t want it to heat in the bin, but typically harvest is when grain prices are at their lowest. This year we’ve already hauled our grain, but we’re staying in the market until May. Using a risk management tool, we set a floor price. That way, if markets go up, we’ll capture the increase in price, and if they go down we’re still comfortable because we set that floor price at the same time as delivery.
This separation of price from delivery provides timing options so we’re not forced into pricing our grain or settling for a disappointing price when we haul. And there’s other benefits: it takes the emotion out of the process, frees up time, and reduces stress around the farm and at home. We’re not constantly watching the markets and worrying about the decisions we’ve made. This leaves room for my husband and I to play hockey through the winter or focus on areas of the farm that need attention.
The danger in trying to time the markets is that pricing even a week too soon or a month too late can make a difference of tens, or even hundreds, of thousands of dollars to your profits. Not so long ago, we saw $16 a bushel and higher soybean futures and more than $14/bu canola futures. Anyone can make money marketing grain under those conditions, but now we’re looking at really tight margins.
By setting a floor price, you can still participate in the market if the markets go up, and if they go down the price is already established. In this way, you guarantee profit margins and mitigate any downside risk, while capturing rallies.
Love it or hate it, risk is part and parcel of farming, and can make the job — and the lifestyle — stressful at times. Volatile markets expose farmers to price and gross margin risk, but there are other sources: price and production risks, macroeconomic risks, and storage and quality risks. The use of risk management tools mitigates or eliminates these risks because they can help with planning delivery around storage and/or cash flow as well as managing price and gross margin risk by using floor prices or forward pricing. And wouldn’t it be nice to feel like you have the time to get back on the ice with the local “old-timers” league again.
What do you base your grain marketing decisions on? I’d love to hear from you. Or contact a Cargill expert today for more information on our grain marketing risk management tools.