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Marketing rules for success in 2013
This year challenged everything about marketing I thought I knew. Nothing worked – not hedging ahead, not seasonal selling, not scale-up selling. I wish I had just harvested it and put it in my bin.” This was the comment from a very frustrated, longtime customer from western Illinois.
December 2012 CBOT Corn
It has been a challenging year for everyone in the grain industry. This includes farmers, ethanol plants, grain elevators, and commodity advisers.
Over the last four years in this “Your Profit” column, I have written about my three-step marketing and risk-management plan.
1. Buy the right Revenue Protection (RP) crop insurance policy for your farm.
2. Get a portion of your insured bushels hedged or sold ahead.
3. Get part of your crop protected with put options.
This plan is like a three-legged stool. You must do all three steps to be successful.
So how did this plan work in 2012 with the explosion in the grain markets?
The farmers who came out the best this year were those in the northern Corn Belt who had a trend line or better crop to sell. Those who bought the 80% or 85% RP crop insurance, especially if they also were able to get a trend-adjusted yield bushel increase, came out second best.
Winning plans also included farmers who did not hedge or forward-sell much of their crops or they used put options rather than hedges.
What didn't work during the huge rally in the grain markets in 2012?
The farmers who took the biggest hit were those who aggressively sold grain ahead early in the year and didn't have crop insurance.
Those who entered into accumulator contracts that doubled up the sales they were making were also hurt. Many of these farmers ended up with more grain forward-sold than they could deliver. For those who used the accumulator contracts, they may have to use some equity out of their land to stay in business for 2013.
Looking ahead to 2013, there are a lot of opportunities. As someone who lived through and worked with farmers in the crash that occurred in the mid-1980s, I never would have dreamed that a bull market in the grain markets could hurt farm income.
For 2013, here are five early guidelines I suggest you take.
1. Get your inputs locked in. With the large increase in global wheat and feed grain acreage in 2013, fertilizer and seed prices will be moving higher.
2. Try to arrange a flex-rent lease with your landlords. With corn at $8 and soybeans at $16, I am hearing of some unrealistic rent expectations for next year.
3. Stay realistic and disciplined in your marketing. The worst thing you can do is to sell ahead a lot of crop one year and then sell none the next year. You could end up wrong two years in a row.
November 2013 CBOT Soybeans
U.S. Dollar Index Weekly
4. Stay aware of the global economic problems and the challenges we'll face after the election this year. A strong U.S. dollar could pressure grain exports and grain prices. Farm prices and farm profits will be pulled down in the next one to two years unless some fundamental changes in how global governments – including the U.S. government – handle the current debt problems.
5. Take a long-term view. When I talked with my longtime customer from western Illinois (mentioned at the beginning), I reminded him that he had made it through the 1980s and he made money when many farms failed. I encouraged him to look at his successes and where he had come from. He had grown his farm from a quarter section of rented land in 1978 to over 3,000 acres today. He did it by taking calculated risks and by being a disciplined scale-up seller and a seasonal seller. I advised him to stick to his marketing plan even during the worst drought in the last 50 years.