The Ingredients to a Successful Grain Marketing Plan

By Ed Usset, University of Minnesota
Extension Grain Marketing Specialist

In old saying among commodity traders is “plan your trades, and then trade your plan.” So the first step in successful grain marketing is to develop a solid plan. Your marketing plan should include price or profit objectives, and a time plan for action. This plan is a necessity, to protect yourself from changing plans on a whim, in response to the market emotions of the moment. Market emotions can and will affect your selling decisions, and a solid trading plan is the only effective weapon against these emotions.

Other elements that are important considerations in the development of a grain marketing plan:

1. Know and Control Your Costs
Wheat is a commodity, and for long-term survival in a commodity market, producers must continually strive to keep production costs low. For growers seeking to get a better handle on their costs and cash flow, I recommend FINPACK, a popular farm financial software package. FINPACK was developed by the University of Minnesota Center for Farm Financial Management, 249 Classroom Office Building, St. Paul, MN  55108. A description and demonstration of FINPACK can also be found on the web at http://www.cffm.umn.edu.

2. Treat Grain Marketing as a Year-Round Task
Too many producers approach grain marketing as a task to be dealt with only after their grain is harvested. In today’s environment of increased price volatility, pricing opportunities can develop any time, sometimes well before the crop is harvested. Weather scares and new crop uncertainty can push prices higher in a developing crop. Many research studies have shown that pre-harvest pricing strategies that take advantage of market bulges are more profitable than post-harvest strategies.

There are several ways to price grain before harvest. Among the tools available are the forward contract, futures contract, and the hedge-to-arrive contract. To sell futures against your developing crop, you will need to open an account with a broker and post margins. With the hedge-to-arrive contract, your local elevator sells futures for you, relieving you of any margin issues. The forward contract is the simplest way to establish a price for your grain. With the forward contract, you can establish a price for your grain with your local elevator well in advance of harvest, with no worry about margin calls.

3. Respect Seasonal Price Trends  
All commodity prices tend to follow some well defined patterns throughout the marketing year. Shown in the chart below is a ten- year history of average monthly Minnesota wheat prices received by farmers. While not every year is the same, we can define certain times in the year as better selling opportunities. For example, the July-September harvest period is (on average) the low period in prices—a good reason to seriously consider pre-harvest pricing strategies—particularly if the crop has developed in an uneventful manner. This chart clearly points to higher average prices in the November/December post-harvest period. The highest prices come in the spring, but producers must bear in mind that a modest price increase so late in the marketing year may not be enough to cover the costs associated with storing grain.

4. Know Your Basis
The effective use of marketing tools demands a solid knowledge of cash-futures price relationships. In the grain trade, wheat prices are usually quoted as so many cents “under” or “over” the futures price. This difference between cash and futures prices is commonly known as the “basis.” The basis is simply the difference between a cash price at a specific location (e.g. wheat prices in Thief River Falls, MN) and the price of a particular futures market (e.g. December futures prices in Minneapolis).

Basis is the link between the general price level (the futures market) and the cash price at some specific location. Local cash prices reflect not only the general price level but also local economic values. These local differences include (1) transportation costs and availability, (2) local supply and demand for the commodity, and (3) the availability of local storage. What really makes basis a valuable decision tool is that basis levels are more predictable than cash and futures prices.

The basis for storable commodities display distinct seasonal patterns (see the following chart of Alvarado and Breckenridge, MN average wheat basis). With grain stocks and the demand for storage high at harvest, cash prices are often at their largest discount to the futures (i.e. the basis is weakest at harvest). As the crop is put away and some is used, the supply of storage increases relative to the demand for its use, and the basis narrows.

The following chart shows how the wheat basis in Alvarado and Breckenridge is at its widest points in August and September, at harvest time. The basis, while different at each location, shows the same strengthening trend into the last two months of the year. The astute decision maker will gather a 3-5 year history of their local basis, using daily or weekly data.

The number of marketing tactics that employ a knowledge of the basis are too numerous to cover here. But one tactic is worthy of discussion. More and more farmers are examining the possibility of “paper farming,” the term used to describe the strategy of selling your harvested grain and replacing the sale with the purchase of futures or call options. The advantages of this strategy are two-fold. First, the farmer is able to generate cash from the sale of wheat. Second, the costs (mainly shrink and interest) and hazards of storing grain are avoided. Let’s examine this idea further by taking into consideration the local basis.

As an example, consider the logic of this strategy when the basis is “weak.” A weak basis simply means that your cash price is lower than normal relative to the futures market. In this situation does it make sense to sell low (sell the depressed cash market) and buy high? Sell low and buy high? That doesn’t make sense! On the other hand, if the basis is strong—cash prices are high relative to futures—this strategy may make very good sense. Paper farming in this situation involves selling the high priced market and buying the low priced market. This one example serves as a reminder of the importance of basis as one more factor in your marketing decisions.

Excerpted from the Small Grains Field Guide, funded by the Minnesota wheat checkoff and produced in cooperation with the Minnesota Wheat Research and Promotion Council.