6 Tips to Get Your Marketing House in Order
This year has started with plenty of concern about low commodity futures prices and wide cash basis prices. Carrie Johnson, a Cargill ag marketing services product line leader, offers six tips for getting your grain marketing house in order for 2018.
1. Know what your true break-even levels are (your cost of production).
Remember to include costs that often get overlooked, like equipment payments, taxes, and even your time. Too often, you estimate your cost of production and being off by just a few cents in these tight markets can be the difference in breaking even or making a profit.
Use those cost-of-production numbers to determine your price targets. Although optimism is necessary to stay in this business, be realistic with price targets, given the current carryouts.
Create a plan to sell into the carry when necessary to achieve your goals. (The carry is the difference between the current price and the price you may get six to 12 months from now.) Holding on to grain until those six to 12 months come around typically results in lower prices for you.
For instance, December corn may be $3.30, whereas, July corn may be $3.65. If you sell corn now on those July numbers or sell into the carry, you guarantee that $3.65 price. If you wait until July to make the sale, history shows that prices fall during the summer, and you may only receive $3.25 or $3.30 for your grain by then. Take advantage of what the market is giving you now to lock in suitable prices in the near future.
2. Estimate profitability projections for 2018 and use the appropriate pricing tool to achieve your goals.
When projecting profits, evaluate the most profitable crop rotation and yields. Commodity carryouts are likely here to stay, so plan to sell into the carry. Establish a delivery schedule for the winter and spring months that matches your cash-flow needs.
3. Understand your risk tolerance.
Risk tolerance is about the willingness and ability to assume risk. For you, this comes down to your capacity to stomach swings in the market (volatility) as well as the tools you use to execute based on your grain marketing plan. There are different tools available with varying levels of complexity and risk, and you should have a firm understanding of how a particular tool or strategy works before taking a position.
4. Use offers to trigger action.
Offers can help to trigger action and keep yourself accountable based on your grain marketing plan. Offers should be based on your price targets. Even if you only sell one truckload at a certain price level, it can work as a reminder to take additional action in the weeks or months ahead. Once you establish a futures or basis offer, do not lift it. If the market moves, then sell more grain in the deferred months.
5. Understand the grain flow and demands in your area.
Grain marketing is best described as cyclical, meaning that historical data can help to show when basis levels typically drop in your area. Work with your local grain adviser to understand the market highs and lows, and use the data to establish basis in those key times. It is best to think about basis as a separate pricing decision.
6. Establish a delivery schedule that fits your operation and stick with it.
Too often, delivery times are delayed in hopes of a last-minute market rally. For example, in 2016, many farmers delivered the bulk of their bin bushels in July and August when prices were historically low. Aside from capturing the worst basis of the year, delivering in late summer can also result in damaged bushels.
A rule of thumb: Determine the number of bushels you want to take into the summer months unpriced to sell during a potential weather rally.
As grain marketing plans begin to take shape, don’t forget about the long-term goals for your farm. Are you looking to expand? Is a succession in the near future? Will you be investing in new technology? Goal planning should not just be done year to year. Developing a three- to five-year plan can help you lay a foundation for long-term success.
Finally, if all else fails, consider investing money in a grain marketing service. There are people who follow the markets and give marketing advice for a living. Marketing grain successfully takes time and commitment.
Disclaimer: Past results are not necessarily indicative of future results. The risk of loss in trading commodity interests can be substantial. CAMS is offered by Cargill Commodity Services Inc., a registered commodity trading advisor and wholly owned subsidiary of Cargill, Incorporated.