Manage Risk with Your Own “Marketing Department”

Risk management in a farming business can mean the difference between merely surviving a tough year and prospering despite a difficult environment. With so many risk factors to face, like weather, world markets and input prices, farmers need tools to manage business basics and beyond.

For many farmers, their biggest risk lies in grain marketing decisions.  Scott Smith, a farmer from Indiana recognized the challenges he faced with grain marketing and turned to Cargill AgHorizons Marketing Services (CAMS) for help.

 Smith pays a per-acre fee for his own “marketing department.” He has an annual business review and planning session, along with quarterly on-farm meetings with Rob Wolter, his personal marketing manager.

“My goal is to recognize Scott’s business goals and risk tolerance to define a plan specific to his needs,” says Wolter.  “We work together to build revenue, which in turns helps Scott build his business.” CAMS sends Smith a daily market commentary and recommended action steps to help Smith make the best marketing decisions for his farm.

Smith says he feels confident about the recommendations put forth by the service. “I don’t have to second guess every marketing decision,” he says.  “I know my decisions are based on CAMS contact with global trading experts, not on one person’s interpretation of the market.” 

Unlike other marketing services, Smith may choose to act on any recommendation and does not sign over Power of Attorney to CAMS. Smith is also free to sell his production anywhere and is not required to deliver his grain to a Cargill AgHorizons facility.

Before signing up for CAMS, Smith explored another advisory service that charged a lower fee, but concluded that Cargill’s worldwide market knowledge and a personal consultation every three months would be more worthwhile. 

“Our goal is to build revenue based on a flat fee, not brokerage income. That reduces a farmer’s worry that the advice is based on building brokerage income instead of market factors,” says Wolter, Smith’s CAMS representative.  “In fact, our customers are not required to use CAMS as their broker.”

Whatever the fee, Smith and Wolter agree that the most important benefit to using an advisory service is taking action in grain marketing. Smith doesn’t second guess his decisions, and he is more consistently able to “pull the trigger” on grain sales. That has helped him avoid losses he has had in the past while agonizing over each marketing decision.

For farmers not paying for expert advice, utilizing other marketing tools can help minimize risk and build revenue.  Averaging contracts allow farmers to capture the average price over a set period – hopefully the period of highest prices.  Contracts such as the Pacer™ and Pacer Plus™ contract from Cargill AgHorizons allow farmers to choose the averaging period. One farmer may choose an early spring timeframe to capture prices of a pre-planting market; another may choose an early summer period to capture market volatility from weather concerns. Both contracts offer a price-out feature that allows a farmer to price all remaining bushels at that day’s closing price when the farmer feels the market will trend lower.

The Pacer Plus™ contract offers a twist on traditional averaging contracts.  The daily market high price is used for each day’s averaging point instead of the market closing price.  This change may provide a measurably higher final price.

Another tool farmers can consider is a contract with a floor price and upside potential if the market trends higher. This tool has been available through minimum price contracts for several years. Cargill AgHorizons has also introduced a family of Floored Average contracts that offer more flexibility and often higher floor prices and lower service fees than traditional minimum price contracts. Farmers often choose a contract with a floor price to establish a marketing plan and capture attractive prices.  Maintaining the ability to capture market upside can help remove lingering doubt often felt with forward contracting.

Managing risk is an ongoing process. Forward contracting and benefiting from expert marketing advice are just two ways to minimize farm business risk.  Take time today to review your risk management plan, or start one, to keep your business strong.

Farmers interested in learning more about Cargill AgHorizons Marketing Services can call 1-866-247-9258.  Farmers interested in learning more about averaging contracts and other contract alternatives offered by Cargill AgHorizons may look online at www.cargillaghorizons.com/aghorizons/performancemarketing/us.htm

Article by Cargill AgHorizons, a business unit of Cargill, Inc. that operates grain facilities throughout the United States.  Cargill AgHorizons Marketing Services is a trade name of Cargill Commodity Services, Inc., a registered commodity trading advisor with the National Futures Association.

When the experts are wrong
Some years, like 2002, can challenge even the most seasoned of marketers.  With late season dryness and harvest prices higher than much of the growing season, farmers made some of their highest sales at harvest-time spot prices.

Cargill AgHorizons customers participating in ProPricingä contracts saw this with varied results and some final futures prices in the lower end of their trading range. Dennis Inman, Customer Solutions Leader for Cargill AgHorizons commented on the results.

“The results achieved by the hedging professional were quite varied. Results from Northstar Commodity and from Cargill AgHorizons Pros were at or near the top third of the market range.  Brock Associates was the exception, a result of lifting hedges in anticipation of higher market movement that didn’t materialize.”

The averaging contracts returned lower than harvest-time prices due to late season volatility. In most years, Inman points out that the spring and early summer averaging period captures the highest seasonal prices.  However, 2002 proved an exception with highest prices in September. The price charts (left) show 2002 as almost an exact opposite to the multi-year average.

Inman says the worst mistake a farmer can make in 2003 is to expect a repeat of 2002.  “In most years, forward contracting returns higher prices than harvest pricing.  Locking in an acceptable price for some of your production is smart marketing. If prices rally later, then you have a chance to capture higher prices on the remaining crop.  But if they don’t, you’ve taken steps to lock in prices and protect yourself from downward trending prices.”

Grain Contracts Offer Caveats, Opportunities

By Betsy Jensen, Ag Commodity Instructor, Northland Community and Technical College,
bjensen@nctc.mnscu.edu

The specialty contracts offered by elevators can be great tools to use in your marketing program, if you use them in moderation, and if you understand the risks associated with the contracts.

Last spring several of my marketing groups developed their own “average marketing contract” since our local elevator did not offer them. We pooled bushels together as a group, and then the elevator sold a percentage of those bushels each week for 4 weeks. Since the sales were made last spring, the price was less than desirable, but the contract did work as it was intended. We sold during what was supposed to be the seasonal high.

I would urge caution when using contracts that turn over bushels to a professional trader who will trade on your behalf. In 2002, many soybean growers who used those contracts discovered the loan rate is no longer the minimum price you can receive. These contracts can be useful, but only in moderation.  Sign up a small percentage of your bushels to these contracts, not a large amount.  A trader who works in Chicago can still make the same mistakes as a farmer in Bisbee, N.D.

Another red flag when using professional grain marketing is a service that requires you to sell at one elevator.  Quality issues have been a major factor in wheat, and problems such as low test weight or low falling numbers can mean significant discounts.  If you have poor quality wheat, it’s usually best to shop around at different elevators and find the best price available. Some grain advisors only sell to one elevator, and that may cost you money.

The various contracts available should make grain marketing easier and more profitable. Do not be afraid to try these new contracts, but make sure they reduce the amount of stress associated with grain marketing, not increase it.