I like a proactive approach to grain marketing. It demands that you look and plan ahead with your grain pricing decisions. Preharvest pricing decisions are made with an eye toward production costs and with respect for some strong seasonal price tendencies. After harvest, decisions are heavily influenced by carrying charges.
Too many pricing decisions are made in a reactive manner. Here are two popular examples of reactive marketing: 1. when a large bill comes due and cash is short, sell grain from the bin to raise cash; 2. harvest is weeks away and another bumper crop looms — I'd better empty the bins of last year's crop to make room for this year's crop.
THE REACTIVE APPROACH to marketing is basing decisions on everything but your desire to sell. I want to avoid reactive marketing.
In sharp contrast to the reactive approach is the overactive approach — the never-ending cycle of re-buying and re-selling with options. Did you sell your crop at harvest? No problem. You can “protect the upside” with an order to re-own the crop with call options. Several months later, you can re-sell the crop for a second time. Uh-oh, is that a high-pressure front setting up over the Corn Belt? Place a new order to re-own the crop for a third time. On and on we go. The overactive approach looks a lot like speculation, and it wears me out.
Proactive marketing calls for making pricing decisions and then, right or wrong, moving forward. I get the sense that many market advisors cannot make a grain sales recommendation without serious consideration of re-ownership with options.
Proactive marketing and re-ownership strategies do not work well together. Proactive marketing is forward looking by nature, looking ahead into next year and beyond for good pricing opportunities. Re-ownership strategies look back, trying to improve on actions and decisions already made. I prefer to look ahead.
A weak spot of the proactive approach is a bull market. When prices are rising over an extended period of time, sales are often too early and too cheap. In 2008, my sales were wrapped up long before $7 corn and $15 soybeans arrived.
The market action of the past year reminds us that a bull market represents just one of three market types. Sideways and bear markets are two other markets that can persist, and when they do, the proactive approach is two thumbs-up. Early sales of the 2009 crop re-affirmed the value of proactive marketing.
My proactive pre-harvest marketing plans for 2010 are written and ready to go. How about yours?
2010 PREHARVEST MARKETING PLAN
(Expected production of 90,000 bu.)
Objective: Buy crop insurance to protect my production risk, and have 75% of my anticipated corn crop (based on APH) priced by early June.
Price 10,000 bu. at $3.65 cash (c) — $4.05 December futures (f) — using forward contract/futures hedge/futures fixed contract.
Price 10,000 bu. at $3.90c/$4.30f, or by March 29; pricing tool tbd.
Price 10,000 bu. at $4.15c/$4.55f, or by April 14; pricing tool tbd.
Price 5,000 bu. at $4.40c/$4.80f, or by April 28; pricing tool tbd.
Price 10,000 bu. at $4.65c/$5.15f, or by May 13; pricing tool tbd.
Price 10,000 bu. at $4.90c/$5.30f, or by May 27; pricing tool tbd.
Price last 10,000 bu. at $5.15c/$5.55f,or by June 10; pricing tool tbd.
Notes: Plan starts Jan. 1, 2010. Earlier sales will be made at a 25¢ premium to price targets above, limited to 35,000 bu.
Ignore decision dates and make no sale if prices are lower than $3.65 local cash price/$4.05 December futures.
Exit all options positions (if any) by mid-September 2010.
Ed Usset is a grain marketing specialist for the University of Minnesota Center for Farm Financial Management (CFFM). He can be reached at [email protected].