Don’t Underestimate the Impact of Smart Marketing

Marketing strategies that increase net price by just 10 cents per bushel could increase net income by 33-50%

By Phyllis Nystrom, market analyst, Country Hedging, Inc., 800-328-6530

It doesn’t come as any surprise to anyone that marketing is the most difficult aspect of farming for the majority of producers. In fact, the “School of Marketing” graphic may be amusing, but in many cases strikes close to home.

According to Iowa State University studies, since 1998 the average Iowa farm has earned a net 20 to 30 cents per bushel (including government payments). In some cases, two-thirds of production is usually sold in the bottom third of the market. Marketing strategies that increase net price by just 10 cents per bushel could increase net income by 33-50%.

Common reasons for selling grain include making room for new crop just prior to harvest, meeting cash flow needs on a must-sell basis, or not locking in an attractive carry when it’s available.  Market carry is the premium distant month futures contracts offer to store, or “carry,” the grain for later sales.

A written marketing plan allows you to plan your trades, and then trade your plan. Managing risk, diversifying risk exposure, increasing profits, improving cash flow, reducing stress, and actually pulling the trigger on sales are all producer benefits of a marketing plan.

Some country elevators can help producers develop plan.  By offering marketing plans and innovative contracts, a country elevator may also benefit by building its customer base, remain competitive, manage logistics better, and maintain profitable producers. Elevators must also take into account the resources required to provide such services, including administration and accounting costs, possible risk exposure on legal issues (having all documents signed and risks disclosed to customer), and customer feedback.

Floored average contract
The new “Floored Average” contract is a cash contract between the grower and the elevator. It guarantees a “floor” (minimum average) futures price for a pre-set cost per bushel. The pricing time period is selected from a menu with different time frames, months, minimums, and costs. 

Based on daily closing prices, this contract may be done in any bushel increment. Grain delivery is required as stated in the forward contract. Basis may be set when you enter the contract or at a later date but before delivery. At the end of the time frame, the grower will receive the higher of the average daily closing futures price during his selected time frame or the floor price. In this case, the pricing is market driven; once the contract is entered into the grower doesn’t have any further decisions to make.

With this type of contract the upside potential is kept, although with an average you do not gain the entire increase. Downside is limited to your pre-selected floor price. This contract follows the “keep it simple” rule.

Managed futures contract
Another type of contract is the “Managed Futures Contract.” Again, this contract is between the elevator and producer and requires delivery. For a fee, your new crop bushels will be managed using seasonals, target prices, and other various strategies. This contract is different from the market-driven contracts in that human decision-making will be involved according to the pre-set pricing levels and risk management of unpriced bushels.

Although these new contracts may not be for everyone, they are marketing tools available to consider. Producers may contact Country Hedging, their local grain elevators, or market advisers to learn more about them.

Marketeer 2003 Offers Improved Features
The “Marketeer 2003” marketing software, developed by the University of Minnesota and Country Hedging, Inc., offers new features to assist producers in developing a marketing plan and putting it into action.

The software enables producers to evaluate and compare from the simplest to the most complex marketing plan.  Producers can analyze how their crop insurance program may impact their plans. The software calculates how your marketing plan fares at higher and/or lower futures prices, and shows how your marketing plan affects your gross income.  

New cash contracts have been added to augment the standard features of Marketeer, and it has been updated with new graphing, dairy programs, and new features that allow for easier use.

Marketeer 2003 requires Windows 98, 2000, NT 4.0, or XP with 64 MB of RAM, 100 MB of free hard drive space, and at least a 300 MHZ Pentium processor. The software can be purchased alone for $295 or as a part of Country Hedging’s consultation packages. A ten day trial version is available for download at www.cffm.umn.edu or call the U of M’s Center for Farm Financial Management at 800-234-1111. Country Hedging also has more information at 800-378-5056 or www.countryhedging.com .