Taming the Bulls & Bears

Lessons Learned in 2007 Marketing

by Betsy Jensen, Ag Commodity Instructor, Northland Community
& Technical College,
betsy.jensen@northlandcollege.edu

While we all made the mistake of selling too early in 2007, things could have been much worse.  If you think it was depressing to deliver your $5 wheat while the cash bid was $15, be aware that larger mistakes were being made by other farmers.

Looking ahead to the 2008 crop, things look great.  If Mother Nature cooperates, we should be able to make money growing wheat. While I can’t offer any advice to help Mother Nature cooperate, I can offer some tips to make sure your crop marketing doesn’t stand in the way of making money.

Most farmers were happy with their 2007 yields, but there were some dry areas with disappointing yields. Farmers contracted their crop insurance guarantee, probably for $5.50, and then discovered at harvest they did not have the bushels to fill their elevator contracts, and now the market was $6 .50.   The elevator was going to need a check for $1 per bushel on all of those missing bushels. If you purchased revenue crop insurance, it helped pay that elevator bill, maybe not exactly $1 per bushel, but close.  The appropriate thing to do is tell the elevator, write the check and be thankful you had revenue-based crop insurance.

The wrong thing to do is become a speculator.  Some farmers gambled on the possibility of wheat going down. Instead of buying back their wheat in September, when prices were similar to the crop insurance levels, they decided to wait until December, and hoped that wheat prices would crash, and maybe, just maybe, the elevator would have to write a check to them.

Unfortunately the gamble did not work. Instead of wheat crashing from September to December, prices rallied $3 or $4.  Instead of writing a check for $1 per bushel, farmers were forced to write checks for $4 or $5, and I am assuming they bought the bushels back in December.  If they waited any longer, the check became $10 or more. Revenue insurance helps ease the pain of buying back bushels, but you have to try and use the same time frame as the revenue insurance.

The lesson to be applied to 2008 marketing is make sure you are a farmer and not a speculator.  I think nearly every farmer thought $6 or $7 was going to be the peak for 2007 wheat prices, and nearly every farmer was wrong. If you have a short crop, follow the rules and buy back those bushels at the appropriate time. I know it is difficult to write a check to the elevator, but the alternative could be much worse. If you do have a short crop, you cannot afford to make the situation worse by speculating. 

A more basic lesson to be learned is never contract more than your crop insurance guarantee, regardless of how wonderful the price.  There is no guarantee the market will go down. If someone would have told me $20 wheat one year ago, I would have locked them in a padded room and taken away any sharp objects.  Now I am tempted to check myself into that padded room.   When forward contracting, stick with your insured bushels. 

Another mistake in 2007 was complicated option strategies. If you have heard me speak this winter, read any of my articles, or attended any of my marketing groups, you know I love, love, love put options for 2008.  I love the security of knowing there is a floor under my wheat price. It’s not as attractive as the cash price, but there are limits to forward contracting (see above paragraph). 

There is always someone out there who tries to complicate the simplest task.  Instead of just buying a put option, you have to buy a put option and sell two calls to pay for it. Or buy calls and sell two puts.  Or buy puts but sell two puts farther out of the money. These are all great strategies, if you are a speculator.  Using put options is not complicated, until you start tinkering with buy and sell combination strategies. 

This year we reached the extremes of price limits, and I would anticipate similar price movements for the 2008 crop, especially with the futures markets changing their price limits every week.  When you use a buy one and sell one (or even sell two) option strategy, you are limiting the effectiveness of your put option.  Plus, most farmers do not understand the risks associated with selling options.   Unless you are a speculator, stick with the basic option strategy:  Buy puts, or sell cash and buy calls. Anything more than that becomes speculative.

The final mistake made in 2007 was selling too early, and farmers are trying to remedy that by not selling at all in 2008.  As I look at farmers’ records for 2007, and talk to elevator managers, it appears the average cash wheat price received was around $6.  I have yet to find someone who will average over $10.  I know there are a few out there, but they are still busy trying to get released from the padded room.

Looking ahead to 2008, I anticipate a much larger spread in the average price. Already many of us have a spread between our 2008 sales of as much as $5.  While $6 is a consistent average price for 2007, where will the average price for 2008 fall? Will some be back to $5, where prices go during harvest?  Or will preharvest sales help some bring the price up to $9?  Maybe wheat will be $20 at harvest for 2008.  I believe the spread between the haves and have-nots will be quite wide for 2008. I cannot guarantee I’ll end up as a “have,” but I am working hard to make sure I am not a “have-not.”  Follow the rules of the game: stick with hedging, leave the speculating to those with deeper pockets, and try not the end up on the bottom of the pile.  2008 could be a wonderful year if you stick with the plan and learn from the mistakes of past years.