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Taming the Bulls & Bears Want to Impress Your Ag Lender? Send Over Your 2001 Grain Marketing Plan By Betsy Jensen,
As farmers, you have plans on when to start planting, plans for what seed variety in which field, and even plans on what to spray for wild oats this year. Few farmers, however, have any plans about their crop sales. Too often farmers produce it, lock it in the bin and sell it when they need some cash. Farmers tend to be more focused on production, but many are becoming aware of how much more money could be made by preparing a marketing plan. This winter, the University of Minnesota Extension Service held seminars on developing a grain marketing plan for 2001. The seminars were taught by Ed Usset, grain marketing specialist for the U of M Extension Service and Bob Craven, Director of the U of M Center for Farm Financial Management, the makers of FINPACK and Marketeer software. It’s easy to think about a marketing plan, but it requires a lot more work to actually put numbers down on paper. Usset, who was a grain buyer for 10 years, says many farmers could learn some valuable lessons from grain buyers. “Grain buyers do have a plan, but not every decision is a home run” he says. “The key is to exercise discipline and make more good decisions than bad.” Discipline is the key word, he says. Too often farmers will make one pricing decision that, in hindsight, is not very good. Then they throw the whole marketing plan — and the discipline needed to carry it through — out the window. Not every pricing decision will be great, he advises, but look towards the broader goal of executing a plan that delivers a good average price and a profitable return to the business. Develop a sound plan, then maintain the discipline to carry it out. In writing a marketing plan (or grain selling plan, if the semantics of that is more appealing and less daunting to you), it’s important to remember that it’s not going to help you sell all your grain at the top of the market. In fact, a marketing plan ensures that you won’t sell all of your grain at the top, or at the bottom. A marketing plan is simply about spreading your risk by setting time and price deadlines. We often enjoy price rallies in the spring, caused by the uncertainties of weather at planting time (too dry, too wet, too late, etc.). Prices at harvest are often lower. A good plan takes advantage of these tendencies with decision deadlines clumped into the planting season. Price targets should be written down, and stick with them if the market reaches your target! If you think $4.00 December futures are a great price, make sure you sell when wheat hits $4. Usset says too many farmers leave 25 cents per bushel or more on the table, and one of their biggest mistakes is a lack of an exit strategy. Farmers take the LDP and hold with no price targets, and no time limits. Instead, what farmers need to do is take the LDP, and then plan to sell when a price objectives or timelines are met—at $4 wheat futures, or by Dec 1, for example. You can come up with your own price and time deadlines, but you need to have them. Let’s say you agree that it’s time to start putting a marketing plan down on paper. But did you realize it’s a good idea to start your plan one year prior to harvest? That’s right, your wheat marketing plan, ideally, should have been written down by Aug 15 last year! The Dec 2001 wheat contract high has been $3.80, which we reached last October. If you had a marketing plan in place by Aug 15, you might have hit that $3.80 target. In the corn market you can already trade the Dec 2002 futures, but the Minneapolis wheat contract hasn’t started trading the 2002 crop yet. It’s never too early to start planning ahead, and even if you haven’t starting thinking about 2001, better late than never. Another great point that Usset mentioned was to contract the 2001 crop, not the 2000 crop. He explains that each marketing year is different, and thus you need to look at the fundamentals for this year, instead of looking back at what would’ve worked well last year. You have to plan for the market going higher or lower, so it’s important to stay neutral and be prepared for both directions. If you still have 2000 and 2001 crop left to sell, you are definitely positioned to take advantage of the upside, but what about the downside potential? Most farmers don’t worry about selling until the combines have started to roll, but that is one year too late. Put your price objectives and time deadlines for selling down on paper. Re-examine your plan every month or when significant changes occur to the market fundamentals. Give a copy of your plan to your ag lender. And importantly, stick with your selling targets. A marketing plan is the first step to becoming a disciplined grain marketer, and I think you’ll find the rewards will be worth the trouble. 2001 Sample Selling Plan This is a sample spring wheat marketing plan from Edward Usset, U of M extension grain marketing specialist. He started making sales at $3.50 Sept futures, and regards that as his minimum price level, figuring that most producers will enjoy a rising LDP at price levels below $3.50 September futures (Even though loan rates are around $2.70, he’s trying to compensate for the 12% protein LDP calculation. It is not certain that $3.50 is an accurate representation for the 14% loan rate, but it’s his best guess based on the past history of LDPs). He has chosen to sell 70% of his insured crop by June to take advantage of the seasonal spring high. By purchasing CRC insurance, he can forward contract 70% with confidence, even if he has production problems. His marketing plan has both price targets and time deadlines if his prices are never hit this spring (note again, however, the $3.50 September futures pricing minimum). Even though he’s used September for his price targets, many farmers may wish to use December (starting at $3.62) or March futures (starting at $3.72) to match their intentions to store grain at harvest, to avoid the heavy discounts that often occur with harvest delivery. Sample 2001 Spring Wheat Pre-Harvest Marketing Plan Objective: Buy crop insurance to protect my production risk, and have 70% of my APH insured wheat crop priced by early June. • Price 10% of anticipated wheat production (2,500 bu.) at $3.50 (Sept wheat) using forward contract/futures hedge/futures fixed contract. • Price another 10% at $3.60, or by 3/20, using some form of forward contract. • Price another 10% at $3.70, or by 4/5, using put options/ a “fence” (buy puts, sell calls for example)/minimum price contract (hang on to the upside potential). • Price another 10% at $3.80, or by 4/20, using some form of forward contract. • Price another 10% at $3.90, or by 5/5, using some form of minimum price contract. • Price another 10% at $4.00, or by 5/20, using some form of mininum price contract. • Price my last 10% at $4.10, or by 6/5, using some form of minimum price contract. Says Usset: “I choose to ignore decision dates if prices are lower than $3.50 September futures. My $3.50 minimum applies to pre-harvest pricing. I am trying to avoid a selling price at less than the loan rate. This minimum does not apply to post-harvest pricing, which calls for a separate plan. It is in the post-harvest plan that I insist that growers show me an exit plan for grain in storage. Also, I don’t consider it a “mistake” to sell some grain at a certain price objective, then have the market continue higher. I am not sure of the term I am looking for, but to call that a “mistake” is to call every pricing decision, except the one that reflects the top of the market, a mistake. It’s too harsh, and not realistic or attainable.” You can follow the progress and execution of Usset’s pre-harvest marketing plans for wheat, corn, and soybeans on the Minnesota Grain Marketing Page at www.apec.umn.edu/faculty/eusset/
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Ag lenders have always been asking for cash flows and
balance sheets, but it is becoming more common for lenders to ask for your marketing plan as well.
