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Everyone has to sell some day!

Agriculture.com Staff 05/16/2008 @ 12:49pm

I frequently hear comments by farmers that every sale they have made in the past two years was wrong.

There is one frequent poster on the "Marketing" talk page who says farmers should never sell into a rising market. Both of these attitudes are wrong. My Murphy's Laws poster says that "The Trend is your Friend". That is true as far as it goes. Riding an uptrend with unpriced grain in inventory certainly adds to the bottom line on your net worth statement. In general, the longer sales are delayed, the better the results if the trend continues.

Two possibilities make this principle not always the best course of action, however. The first is that no one knows how long the trend will last or how high prices will go. Demand is very good for all grains today. However, with corn futures over $6 and soybeans over $13, who is to say that the bullishness is not already bid into the prices? There is no historic precedent that compares to today's supply and demand situation. Some psychological factor could come into the market that would take prices down. Big hedge and speculative funds exiting the market could certainly have that effect. Prices could drop twenty percent and still be high historically, but much below where they are today. If you think this cannot happen to soybeans and corn, take a look at charts of recent wheat prices!

Secondly, regardless of price outlook, most of us need to generate cash flow. If you have an operating loan and unpriced grain in the bin, you are speculating with borrowed money. That is not an unusual situation for farmers. However, doing it at these price levels makes it more risky than normal. In my almost 40 years of farming, selling grain and paying off operating loans has been one of the most consistently good financial strategies. Timing of sales should be based on techniques that consistently result in good prices, such as historic price patterns or technical signals.

Avoiding sales because of outlook can wreck a sound tax management plan. Even if prices appear to be headed higher, enough income needs to be generated to offset operating expenses and take advantage of standard deductions. Pushing too much income forward may result in losing a year's standard deduction and raising the tax bracket in the year the grain is sold. Mismanaging the tax strategy can take away all of the advantages of selling at a higher price, especially if the price ends up going down instead of up before the sales are made.

Finally, regardless of how high the price goes, you are not rich until the money is in the bank. A million dollars worth of grain is not a million dollars until the grain is sold and the check is cashed. No matter what the outlook, grain is raised to be sold. No one is smart enough to know what the high price is. The successful marketer is the one who gets a high net return on a large number of bushels after expenses, taxes and interest. This does not necessarily mean hitting the top on every bushel. It does mean managing your assets in a logical and sensible manner.

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