Big questions around grain marketing optimization?

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Farmer
Choosing the right marketing strategy for your operation depends on two things:
  1. The price risk you are willing to accept, and
  2. The time you are willing to devote to developing a strategy.

No one can tell you for certain what the markets will do. Prices may go up, and they may go down. But there are marketing edges available to you for increasing your profitability – you just need time to study them. Here are four types of grain marketing strategies to analyze.

Spot Pricing. One of the least complex strategies available today, spot pricing allows you to turn all of your decision making over to the market. You are free to just show up with grain at your favorite buyer’s doorstep. Most times, there won’t even be a contract to review; grain can be turned to cash in a matter of days or even hours. The best part: you never really feel responsible if the price is bad. (The market did that to you.)

The worst part of this strategy, though, is return on investment. All those months ago, you laid out cash to plant, grow, and harvest a crop, but now you have little control over how that investment is paying off. So, make sure to only use spot pricing if your operation has an excellent balance sheet – one that can withstand extremely volatile swings in profitability.

Cash Forward. Forward contracting grain for future delivery adds a small amount of complexity to your operation, for bad and for good. Not only have you set delivery obligations, but you also now have to keep track of them. There’s an associated performance risk, since falling flat on production and not meeting the crop specs will put you in a bind.

At the same time, for each bushel you forward contract, you have eliminated price risk and lowered the volatility of your profitability.

The hardest part about this strategy? You will likely start playing Monday morning quarterback, feeling bad about sales that are below the market.

Based on my 15 years of grain marketing experience, I believe growers who spend time studying forward contracts also get involved in every other detail of grain marketing. It’s their gateway to more informed pricing strategies – but it could be taken too far. They’ll start thinking about carry in the market, they’ll start comparing multiple facility prices among multiple delivery windows, and they’ll take stock of various transportation options available for moving grain. What starts with a lean ends with almost falling over, so lost in making an optimal decision that the equation for profitability has gotten too long.

Added focus, however, always improves the odds of selling a profitable crop. Knowing your cost of production and locking in cash flow and profits when they make financial sense should be rewarding, especially while knowing that your crop insurance will likely lower your performance risk. Use this strategy if you would like a solid return to your bottom line on the time spent learning something new about grain marketing.

Separating Futures and Basis. Often futures and basis aren’t optimal at the same time. When you start to focus on them separately, you will often see how attractive futures make basis less attractive, and vice versa.

While this strategy has all of the benefits and the headaches of cash forward contracts, there is some added complexity.

First, separated contracts must be managed multiple times throughout their lifecycle. Unlike a cash forward contract – where you just set it and forget it until delivery – these contracts will only have one component locked in. At some point, you will have to go back and lock in the other component. 

Second, only some of the final cash price is locked in using this strategy, so you won’t know exactly what your profits will be on a sale until you have it final priced. An advanced student of these contracts will have a good understanding of historical values as well as a bias on spreads that can lead to even more opportunities.

Use these strategies if you are ready to understand historical values and seasonal trends. You should also have a good system of tracking sales or a trusted partner to assist in this.

Pricing Products. Over-the-counter pricing products can add even more complexity to your marketing by locking in a range of prices that are not known until the end of the pricing window.  They take advantage of things like market volatility, technical ranges, and layered option strategies. The advantages of the added complexities are often premiums to the current market in exchange for taking on short price risk, or minimum prices that leave upside potential open for a lower investment than a normal option strategy.

These pricing products should be reserved for those that really want to understand all the tools available to them and have the time to learn them. An advanced marketer would know what types of products would benefit in any market condition and be able to customize one that meets his or her business needs.

Where do you begin? If you are looking to get more sophisticated in your marketing plan, I would suggest starting in small increments, adding more complex contracts only after you’re comfortable. There is no way to learn faster than the hard way – but when you start with a small percentage of your operation, a hard lesson won’t have much of a negative impact. Using a partner that understands the nuances of these contracts, like Indigo, will also help eliminate any surprises in the end.

Rodney Connor, Sr. Director, Basis Analyst Indigo. Rodney Connor has 15 years of experience trading grain, first with Cargill, then with Growmark, and now with Indigo as the Head of Pricing Tools and Services. He still lives near the farm he grew up on in Dwight, Illinois, and today serves as the president for the town's economic alliance. He co-hosts a podcast, GrainWaves.

Contact a Grain Marketing Specialist today at (240) 833-7884


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