If diversification is a way to help reduce risk, and grain marketing can feel like a risky endeavor, why do more farmers not take a diversified approach?
It’s how the mutual fund industry has attracted trillions of dollars. And if it works for your retirement savings, diversification can also work for your day-to-day grain marketing. Here are five tips to help you diversify your approach:
1. Make a plan. How much cash do you need by when? Line this up with your grain delivery timing. Writing it down helps you see exactly how much grain you need to sell to meet your commitments.
2. Separate pricing and delivery. Be bold and price more of your grain when you can take advantage of the seasonality of the markets. The best timing is generally through the uncertainty of the growing season.
3. Understand the true risk of forward contracting. Statistics show that forward contracting pays. It can feel like selling when the crop’s yield and quality is unknown is risky, and to an extent that can be true. If you sell to a level of your maximum yield before your crop is produced, you likely create risk for yourself. But you could forward contract SOME of your grain, pricing more aggressively in the uncertain spring/early summer season. – the benefits versus the risk will become clear. At what level are you comfortable to start pricing? The first 10 bushels? The first 20 bushels?
4. Use a diverse set of contracts. Start by learning more about the selection of contracts offered today. There is a place for the traditional spot grain contract, but branching out to different kinds of contracts (see the illustration) can help diversify your grain marketing approach and offer features that may:
a. provide the protection of a guaranteed minimum price while allowing upside participation in the market;
b. bring you extra cash or a market leading price for a future offer of selling more grain if the market is at or above a set price;
c. average the price over time;
d. take some of the decision making load off your shoulders; or
e. allow you to get back in the market after you’ve already made a pricing decision.
5. Spread out your basis decisions. With Cargill, you aren’t obligated to either take the basis or nothing. Avoid the remorse that can come with an unforeseen basis swing in the wrong direction by taking a “dollar cost-averaging” approach. On a forward contract, lock in a portion of your basis every month or every quarter. Apply any basis that is offered to the applicable forward contract so you are not left out of short-term basis opportunities when you forward contract.
This diversification wheel can be a useful way to categorize different contracts.