Content ID

170200

Analyst: Not Having a Marketing Plan is Dangerous

Harvest continues to push along, suggesting farmers are preoccupied with the task at hand: completing harvest. Yet, it’s important to keep your eye on opportunities for next year and even 2018. Harvest is generally a time of year when prices are trying to find a bottom. When the market does rally and the mindset changes to a friendlier price outlook, it’s easy to do nothing from a marketing perspective. Last year was a prime example. Prices rallied, and just as quickly fell apart. Too many producers have spent months lamenting what could have been if only they’d taken action when prices were higher.
 
The lesson that may have been learned in both 2015 and 2016 is that setting target points to sell (and keeping them in place) paid big dividends. More importantly, those who may have strategized beforehand, so that they could maintain a disciplined approach to marketing, likely benefitted more than others who intended to sell and just didn’t get it done. With current prices hovering near contract lows and harvest near 50% complete, now is your opportunity to purchase call options with plenty of time in front of them. Call options provide the purchaser the right (not the obligation) to own futures at a specified price. With prices trending in a sideways pattern (particularly corn), there is little urgency from a day-to-day perspective to make a decision. Yet, bear in mind how fast prices can move once they begin a trend. If you wait for news to confirm prices are trending higher, buying call options can become more expensive.
 
There are a couple of reasons to purchase call options. One is to provide the confidence and discipline for you to set and maintain target levels to sell cash grain. The second is to cover these sales should prices break to the topside. Another advantage to consider purchasing call options is that, if prices do rally, it is highly likely that basis levels will weaken. Once cash sales are made, this is no longer basis risk. Should futures prices continue to move higher, the call option eventually will move penny-for-penny with futures as it gets deeper in the money. 
 
Take time soon, once harvest is done or if you get a rain delay, and begin setting realistic target points to sell once prices move higher. In order for prices to move much higher, something more significant must come into play, such as weather. Supply concerns, at the end of each of the last four years, have been of little consequence, as good weather has provided for high yields. That is the case in most years. Yet, there will be a year where high yields may not be in the cards. With a growing demand base, the stage is set for a significant weather-related price rally. Sell cash responsibly, and use call options to retain your ownership. Begin the planning process now.
 
If you have questions or comments, or would like help in creating a balanced strategy for your operation, contact Bryan at Top Farmer Intelligence (800-TOP-FARM, ext. 129).
 
Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.

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