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Does price volatility benefit farmers?

Agriculture.com Staff 11/19/2009 @ 7:30am

Ask a farmer if he or she likes high prices and you'll probably get a positive answer. When volatility correlates with high prices, volatility is good. Futures exchanges point to the fact that active trading and volatile prices are normally associated with higher prices of grain futures contracts.

A big unknown is how much of the higher futures price trickles down to farms. I suspect very little makes it to farmers' hands.

An experience early in my farming career in 1972 shows why I think that is the case. A nearby small farmer, nearing retirement, finished harvest early. He was delighted that the cash soybean price, which had hovered near $2.50 for years, was $3. He sold his crop in October. My harvest didn't end until December because I farmed more acres with a borrowed combine. By then, cash beans were $4. Like my neighbor, I was delighted with the price and I sold out. By the next summer, soybeans were $10.

Marketing decisions tend to be based on emotions, not on sound strategy. So farmers probably don't gain nearly as much from volatility as would seem logical from the higher prices. There are few facts or hard evidence to help the producer capture the higher quotes that show up on elevator quote boards.

Some ag advisers to futures regulators theorized in the 1980s that some marketing tools like futures, options and insurance products, in inexperienced hands, add a level of risk for farmers that may not result in increased profitability. A common problem in making decisions during volatile times is selling too much too soon, as my neighbor and I did in 1972. Or, holding too much past the price peak and selling too late as many farmers did in 2008-2009.

Here are 6 principles that can help you capture a bigger share of higher prices induced by volatility.

Futures prices are lower at harvest and higher in the late spring and early summer. Concentrate pre- and post- harvest sales in April, May, and June.

Basis improves when harvest is over. Avoid fall sales off the combine. If you're going to get windfall prices on cash grain, odds are it will happen in summer before the new crop size is known.

The best marketing strategies have a predictability of about 70%. Make sales and do not look back. You will not be right every time.

Divide the crop and sell in increments to reduce the risk of hitting a major low with a big part of your crop. Sell some before harvest and some after. This also improves your odds of hitting a major high with a portion of your crop.

Base strategies on principles that have proven effective over many years. Be consistent and disciplined. Don't second-guess a decision. Use drop-dead dates to trigger sales at the end of the marketing year so you don't get stuck with last year's crop.

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