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Markets ignore cost of production

12/10/2010 @ 12:47pm

A comment on the Agriculture.com Marketing Talk forum this week by Jim Meade brought a lot of response from readers. I have known Jim since Agriculture.com started some 15 years ago. He has a lot of practical knowledge about grain marketing. Specifically, his frustration was with the lack of good triggers for making grain sales that are any better than guessing at future price direction.

 

Jim especially is critical of those who propose selling when a certain profit level “is assured." He questions how you can ever be assured of a certain profit level no matter what the price is. He bases his theory on the difference in costs between large and small farmers. He also questions how input prices can be locked in at the same time as grain is forward prices.

 

Several years ago I did a series of meetings in Iowa. After my explanation of how I use seasonal price trends, a representative of one of the sponsoring organizations ask me what part cost of production played in forward pricing. He was shocked when I responded that cost of production had little to do with my marketing decisions. There are several reasons why that is true.

 

The first is that I farm in an area where rainfall can vary greatly from year to year. I cannot know my cost of production until I know yields. By the time I know my yields the opportunities for forward pricing are past. This year was a prime example of that factor.  My soybean yields were the highest ever. Corn yields were disappointing. My cost of production per bushel for soybeans was very low. Breakeven on corn was much higher in relative terms.

 

A second factor is that we all have different ways of calculating land cost and machinery cost. My machinery is all old and has been paid for several years. I own all of my land free and clear. Does this mean that I should sell my crops for less than a neighbor who recently bought a new tractor or who is making land payments?

 

Good prices are as important to me because I have fewer bushels to sell! Add to this confusion the fact that I farm with a 4440 tractor that I could sell today for more than I paid for it in 1983. Does that mean the cost that tractor is zero? Some would say to assign a reasonable cost to each of these line items. Since everyone uses a different formula to estimate costs, breakeven prices will likewise be quite variable.

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