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What have we learned?

Agriculture.com Staff 01/23/2009 @ 2:17pm

My busy season is here. I had four "Winning the Game" workshops in the last two weeks.

If I count correctly, there are sixteen more that I will be participating in, plus several that are being done by my colleagues in the UNL Extension service. It is interesting to observe the different approaches to marketing used by farmers in the various meetings. Some are reluctant to try anything beyond conventional cash forward contracts. Others are more aggressive and try out various option and basis strategies to achieve the highest possible returns for their crops.

There are some principles that come out from playing the game hundreds of times over a period of many years that can add profit to grain farmers' bottom lines when marketing real bushels of soybeans and corn. The first is that sales made during the months of late March, April, May and early June produce the greatest probability of hitting high prices, regardless of the tools used to do the pricing or strategy used in timing the sale.

Selling in increments spaced out over those months time after time produces better results than trying to hit the top with one big sale. It may occasionally be possible to hit the absolute top with a sale, but routinely trying to do it will generally result in frustration and mediocre results.

Managing the basis can add pennies to the price per bushel in most years. Basis patterns are somewhat consistent from one year to the next. Basis is poor early in the forward contracting year. There is about an 80 percent probability that the basis will improve, at some point, sometime before harvest, compared to sales made many months prior.

Farmers trying to get the best basis will necessarily need to use strategies other than cash forward contracts to diversify their approach. Selling futures, then locking in the basis at a later time with a basis or cash forward contract is the most common way to take advantage of basis moves.

Options have a place in pricing those bushels the farmer is not sure of producing. The cost of the premium will reduce the net income, so options purchases must be done carefully with an eye toward keeping the cost down as much as possible. In many cases crop insurance with a price component is an economic alternative to options. Understanding the various types of crop insurance policies is a key to judicious use of these tools.

Having a large proportion of the crop priced before prices head down into harvest is the biggest factor influencing getting maximum returns for the crop. By using futures or options instead of cash forward contracts, an individual can develop strategies that take advantage of both early price strength and post harvest price appreciation from storage. As of now, we do not have a combination pre and post harvest game available. I hope this is something that can be added for next year's workshops.

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