Survey: Farmers Using More Tools to Market Commodities
2014 Benchmark Marketing Survey
As the price environment gets tougher, farmers are using more of the marketing tools available to extract profits from a tightening marketplace.
That’s the most striking difference from a year ago in the annual Successful Farming® Benchmark Marketing Survey for 2014-15. When asked, “Which of the following marketing tools do you typically use?” there was a significant increase in several tools.
Between one fourth and one third of the sample of readers now use futures, options, basis contracts, and hedge-to-arrive (HTA) contracts. Yet, a bigger majority, 86%, relies on cash sales.
Because some farmers typically use a variety of marketing tools, the survey allowed them to list all of the approaches used.
The shift in marketing isn’t as dramatic as it looks at first glance, however. When asked what percentage of a crop or livestock was sold with each tool, the changes were small. With corn, for example, the amount sold for cash dropped from 52% in 2013 to 50% this year, on average; 23% was sold with a cash forward contract both years. The amount sold with futures rose from 9% last year to just 10% this year. The use of options rose from 3% to 4%. Basis contracts covered 6% both years, and the use of HTA contracts rose from 5% to just 6%.
Steve Wellman, who farms near Syracuse, Nebraska, sees farmers sticking with what they know best.
“To me, farmers are very comfortable with the cash market and dealing with the local elevator,” says Wellman, a past president of the American Soybean Association who agreed to be part of an advisory group that helped put together this marketing survey.
“Farmers are still generally satisfied with what they’re doing,” he says.
In the cash market, “you’ve accepted basically a price for your product, and that’s it,” he says. If you use futures, you do have a chance to look for a better basis from several buyers. That chance to shop around was listed most often (by 55%) among survey respondents who do use futures.
One of the main purposes of the survey is to allow farmers to compare their success with others, without requiring detailed financial information. Farmers were asked to rate themselves on a scale of 1 to 10, with 1 being very poor and 10 as excellent.
As you might expect, most farmers put themselves somewhere near the middle. Very few, less than 2%, rated their marketing with either a 1 or a 10 in 2013 or in 2014. Last year, 28% rated their marketing with a 5. This year, nearly a third – 31.7% – clumped in the middle. A year ago, most respondents were at 5 or better: 19.2% gave themselves a 6, 22% chose 7, and 19.2% picked 8. This year, only 11.3% picked 8, 17.9% picked 7, and 14.3% picked 6. A few more farmers rated their marketing below 5, with those picking 3 jumping from 1.7% last year to 8.3% this year.
“With the price scenario of the past few years, it was pretty easy to feel good about marketing,” says Wellman. “Now, with lower prices, maybe people are considering it differently.”
Even Split on Goals
Other questions in the survey show almost no change in farmers’ overall marketing strategy. A year ago, 52.9% said their primary goal of marketing is enhancing price; 47.9% said it’s managing risk. This year, the answers were an even split of 50% for each goal.
A couple of new questions show similar consistency. When asked if their primary marketing goal has changed, 57.7% said no. When asked, “Have you considered changing how you make marketing decisions, including hiring or changing outside advisers?” 60.9% said no. In fact, the percentage who make their marketing decisions independently rose from 77% last year to 80% in 2014.
Among the farmers who don’t use futures, the top reason was “I don’t trust futures brokers/advisers.” A year ago, 27% chose that reason, behind two others: that they like working with their co-op or elevator manager to forward contract, or they find it convenient to forward contract.
Another member of the advisory panel, Roy Smith of Plattsmouth, Nebraska, wasn’t surprised by any of these results.
“Cash forward contracts are simple, easy, and clear as to the final return,” says Smith, a long-time contributor of marketing commentary for Agriculture.com. “Basis is locked in, for better or worse. It’s easy to understand why they remain popular as the means to forward price. In addition, there is no margin requirement, which appeals to most farmers.
“On the other side, options remain largely off the radar screen,” he adds. “Most people use options to replace inventory already sold. The nature of the strategy almost guarantees a loss. If more people used put options instead of calls, options would probably be more popular. However options strategies can be quite complicated, which does not meet with favor by most marketers.”
Seasonals are Back
Iowa State University agricultural economist Chad Hart finds the traditional results of this survey lining up well with the markets themselves, which are returning to seasonal patterns. At the time the survey was done just before harvest, there was carry in the market. Higher futures prices in deferred delivery months reward storing both corn and soybeans after harvest and selling later, either in the cash market or with a forward contract, he says.
“What farmers are seeing in the market is the pattern we’re used to seeing, that seasonal pattern,” Hart says. “This was the way markets looked before the ethanol boom.”
Just as before that boom, they’re trading in a narrow range – between $3.50 and $4 a bushel on corn and $9.50 to $10 a bushel on soybeans.
Nor was Hart surprised by the shift toward less positive views of farmers’ success in marketing. He has talked to farmers who were disappointed in hindsight that they didn’t sell more of 2014 crops last spring at higher prices.
“We’re always influenced by our most previous result,” he says. “As they look forward to the 2014-2015 crop year, they see that marketing is going to be a lot rougher than it has been.”
Hart is another member of the advisory group for this survey. The other advisers were economists Darrel Good at the University of Illinois, Chris Hurt at Purdue University, and Frayne Olson at North Dakota State University.