Prairie Grains Jan.-Feb. 98

Issue 11
Jan./Feb. 1998

Taming the Bulls & the Bears

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Prairie Grains is the
official publication of
the Minnesota
Association of
Wheat Growers,
North Dakota Grain
Growers Association,
South Dakota Wheat,
Inc., and the
Minnesota Barley
Growers Association.

Develop A Marketing Plan, Then Implement It

By George Flaskerud, NDSU Extension Crops Economist
Take time to develop a marketing plan for each crop that will be produced in 1998. Doing so could mean the difference between profit and loss for the farm. It could even mean the difference between survival and bankruptcy. Developing a marketing plan is probably the single most important management activity on the farm: a marketing plan for each crop is essential to overall farm financial planning.
In financial planning it is necessary to combine crop production costs and government farm program payments with a marketing plan. This permits costs and returns to be estimated for the farm. Then it can be determined if the farm's cash will flow and if production will be profitable. If cash flow or profit problems appear, costs may need to be reduced or alternative enterprises considered.
It is best to keep the marketing plan for a crop fairly simple. Key elements include price objectives and time deadlines.
Price objectives are matched with time deadlines. About five objectives and corresponding deadlines are usually specified in a marketing plan. A percentage of the crop is sold when either the first price objective or time deadline is reached. Another percentage of the crop is sold when either the second price objective or second time deadline is reached, and so on. The largest percentage is sold in the middle of the price range.
Time deadlines for selling a crop can be derived from the seasonal price pattern for that crop. Those times of the year when cash prices are usually the highest would be picked as selling deadlines, recognizing that they may need to be modified to meet cash flow needs and storage limitations. Seasonal price patterns for many of the crops produced in North Dakota are presented in NDSU Extension Service Circular EC921.
Price objectives are set relative to a goal. A goal could be to sell in the upper onethird of the price range for the marketing year. A more modest goal would be sell the crop for a price above the state seasonal average farm price. Although seemingly modest, this goal is difficult to achieve, according to marketing publications.
The seasonal average farm price expected for a crop can be derived from several sources of information. Sources include current cash prices, cash forward contract prices, the futures market, USDA's price projections, and estimates by marketing advisory services.
If the goal is to sell above the state seasonal average, the lowest price objective would be set at about that level. The other price objectives could be evenly spaced so that the highest is about 115120% of the lowest. Price charts can also be used as a guide in setting these other price objectives.
An example marketing plan for 14 % protein hard red spring wheat produced in 1998 is presented here.
Expected MGE Production Sept. Futures Percent Deadline Price 10 4/30/98 4.10 25 5/14/98 4.30 30 11/19/98 4.50 25 1/28/99 4.70 10 4/29/99 4.90

This plan calls for selling 10% of the anticipated spring wheat crop by April 30, 1998 or when the Minneapolis Grain Exchange September futures price reaches $4.10, whichever comes first. It calls for selling an additional 25% by May 14, 1998 or when the price reaches $4.30; selling an additional 30% by Nov. 19, 1998 or when the price reaches $4.50; selling an additional 25% by Jan. 28, 1999 or when the price reaches $4.70; and selling the final 10% by April 29, 1999 or when the price reaches $4.90.
Marketing plans need to be reviewed and adjusted as new information becomes available. USDA reports generally provide the basic information for updating. This information can be supplemented by news reports of crop conditions throughout the world, weather reports, and so on.
A marketing plan can be implemented using a number of marketing tools. The best tool to use depends on the situation. The use of contracts as part of your marketing strategy makes farm management sense, especially on that portion of production that can be produced with near certainty, probably the first one-third.
Cash forward contracts, hedged-to-arrive contracts (sometimes called futures fixed contracts), and minimum price contracts are contract alternatives that should be looked at for making preharvest sales. The best contract for a producer to use largely depends on current and expected futures prices, basis and cash prices.
The put option is an attractive marketing tool because it leaves upside price potential open and does not require delivery. But, that flexibility costs something which must be paid for at the time of purchase. Consider using put options where uncertainty is the greatest. In effect, this would be when uncertainty involves not only price but production, probably the second one-third of production if sold prior to harvest.
Selling one-third of anticipated production using a cash forward contract or a futures fixed contract and one-third using put options manages an enormous amount of price risk. A floor price is established on two-thirds of anticipated production but the price is still open on two-thirds.
The use of both contracts and put options is one way to manage price risk. Both should be a part of your marketing strategy.
"Taming the Bulls and Bears" is a market education feature of Prairie Grains. If you have a question or topic you'd like to see addressed in this feature, send it to: Minnesota Wheat, attn: Prairie Grains editor, 2600 wheat drive, Red Lake Falls, MN, 56750. Phone: 1-800-242-6118. Email: mnwheat@means.net.

Copyright Prairie
Grains Magazine January 1998

Issue 11 Jan./Feb. 1998	Taming the Bulls & the Bears

Library Home E-Mail Back Prairie Grains is the official publication of the Minnesota Association of Wheat Growers, North Dakota Grain Growers Association, South Dakota Wheat, Inc., and the Minnesota Barley Growers Association.	Develop A Marketing Plan, Then Implement It By George Flaskerud, NDSU Extension Crops Economist Take time to develop a marketing plan for each crop that will be produced in 1998. Doing so could mean the difference between profit and loss for the farm. It could even mean the difference between survival and bankruptcy. Developing a marketing plan is probably the single most important management activity on the farm: a marketing plan for each crop is essential to overall farm financial planning. In financial planning it is necessary to combine crop production costs and government farm program payments with a marketing plan. This permits costs and returns to be estimated for the farm. Then it can be determined if the farm's cash will flow and if production will be profitable. If cash flow or profit problems appear, costs may need to be reduced or alternative enterprises considered. It is best to keep the marketing plan for a crop fairly simple. Key elements include price objectives and time deadlines. Price objectives are matched with time deadlines. About five objectives and corresponding deadlines are usually specified in a marketing plan. A percentage of the crop is sold when either the first price objective or time deadline is reached. Another percentage of the crop is sold when either the second price objective or second time deadline is reached, and so on. The largest percentage is sold in the middle of the price range. Time deadlines for selling a crop can be derived from the seasonal price pattern for that crop. Those times of the year when cash prices are usually the highest would be picked as selling deadlines, recognizing that they may need to be modified to meet cash flow needs and storage limitations. Seasonal price patterns for many of the crops produced in North Dakota are presented in NDSU Extension Service Circular EC921. Price objectives are set relative to a goal. A goal could be to sell in the upper onethird of the price range for the marketing year. A more modest goal would be sell the crop for a price above the state seasonal average farm price. Although seemingly modest, this goal is difficult to achieve, according to marketing publications. The seasonal average farm price expected for a crop can be derived from several sources of information. Sources include current cash prices, cash forward contract prices, the futures market, USDA's price projections, and estimates by marketing advisory services. If the goal is to sell above the state seasonal average, the lowest price objective would be set at about that level. The other price objectives could be evenly spaced so that the highest is about 115120% of the lowest. Price charts can also be used as a guide in setting these other price objectives. An example marketing plan for 14 % protein hard red spring wheat produced in 1998 is presented here. Expected MGE Production Sept. Futures Percent Deadline Price 10 4/30/98 4.10 25 5/14/98 4.30 30 11/19/98 4.50 25 1/28/99 4.70 10 4/29/99 4.90 This plan calls for selling 10% of the anticipated spring wheat crop by April 30, 1998 or when the Minneapolis Grain Exchange September futures price reaches $4.10, whichever comes first. It calls for selling an additional 25% by May 14, 1998 or when the price reaches $4.30; selling an additional 30% by Nov. 19, 1998 or when the price reaches $4.50; selling an additional 25% by Jan. 28, 1999 or when the price reaches $4.70; and selling the final 10% by April 29, 1999 or when the price reaches $4.90. Marketing plans need to be reviewed and adjusted as new information becomes available. USDA reports generally provide the basic information for updating. This information can be supplemented by news reports of crop conditions throughout the world, weather reports, and so on. A marketing plan can be implemented using a number of marketing tools. The best tool to use depends on the situation. The use of contracts as part of your marketing strategy makes farm management sense, especially on that portion of production that can be produced with near certainty, probably the first one-third. Cash forward contracts, hedged-to-arrive contracts (sometimes called futures fixed contracts), and minimum price contracts are contract alternatives that should be looked at for making preharvest sales. The best contract for a producer to use largely depends on current and expected futures prices, basis and cash prices. The put option is an attractive marketing tool because it leaves upside price potential open and does not require delivery. But, that flexibility costs something which must be paid for at the time of purchase. Consider using put options where uncertainty is the greatest. In effect, this would be when uncertainty involves not only price but production, probably the second one-third of production if sold prior to harvest. Selling one-third of anticipated production using a cash forward contract or a futures fixed contract and one-third using put options manages an enormous amount of price risk. A floor price is established on two-thirds of anticipated production but the price is still open on two-thirds. The use of both contracts and put options is one way to manage price risk. Both should be a part of your marketing strategy. "Taming the Bulls and Bears" is a market education feature of Prairie Grains. If you have a question or topic you'd like to see addressed in this feature, send it to: Minnesota Wheat, attn: Prairie Grains editor, 2600 wheat drive, Red Lake Falls, MN, 56750. Phone: 1-800-242-6118. Email: mnwheat@means.net.
Copyright Prairie Grains Magazine January 1998