DON’T CALL ME AN EXPERT
This is just the way I do things

Marketing Made Simple (Or At Least I Think So)

By Steve Wagner

I  was born and raised on a dairy farm about 20 miles south of St. Paul, Minn.  I attended St. Thomas University in Minneapolis and graduated with a B.A. in Business Finance. Since graduation, I have worked for three major grain companies and two small country elevators. Two things remained constant during this time: I have always farmed (corn and beans, in Dakota County south of the Twin Cities) and I have always worked with producers.

And although there have been many changes and challenges in agriculture since I’ve been involved in it, one other thing that has remained constant is the need for a comprehensive plan.  A plan that takes into consideration production, financing, marketing and understanding the effect government programs will have on your farm.

My marketing strategy is simple. I divide my crop into five sales per crop based on FSA yield average and what I grow that year.  I market each crop in a 24-month window – at 18 months before the crop is harvested and at six months after the crop is harvested.  This means, at any given time, I will be marketing multiple crops for multiple years.  I divide my crop into five sales, because I can afford to make a small mistake in marketing.  I cannot afford to make a big mistake by selling all at one time or at one price.

Before I go further, let me add that I also believe crop insurance is a key component of any marketing plan. If I can reduce my risk by buying RA or CRC insurance, I will get a better return on my investment.  These insurance plans are my safety net. Government loans won’t cover the cost of inputs, let alone the cost of production. These insurance products do two things.  First, they raise the level of support I am covered at. Total production costs were covered under most RA or CRC policies this year.  And second, they give me the confidence to make sales, because I am guaranteed a certain amount of revenue from each acre of production whether the crop is there or not. 

Now back to my five sales. The most common question I have been asked in my 26 years in the grain business is: Why five times for each crop? Why not just sell the high?  You are the expert! First, there are no experts. Anyone who says they can hit the high or the low is mistaken.  If they could really do this, they would take their advice and retire. Second, it goes back to big mistakes versus little ones.  I can afford to be wrong on 20% of my crop; I cannot afford to be wrong on all of it. 

When I make sales
I start making sales when a few things take place in the market. First, when the seasonal trends indicate that sales should be made.  Second, when prices exceed the average USDA projected price for the year. And last, around industry predictions for that crop. When these three indicators have been reached, 20% of my crop is sold.  This is usually the easiest sale to make.

I sell most of my crop forward because 90% of the time the best price is prior to harvest.  This goes back to an old industry saying, “buy the rumor, sell the fact.”  Once the crop size is known, the market can price its worth and that is usually at a lower price. 

I also reference key dates in each marketing year, starting with the prospective planting report at the end of March. This is the market’s first good clue as to what crop is actually going to get planted. I try to sell 20%  just before or right after this report is out. I sell the next 20% on the first acreage report for the crop, out in mid-June.  This report tells the market what acreage crop is actually out there. The last date I use is the first production report which comes out the second week in July. Again, I sell 20%. I may sell just prior to the report coming out, because these are the first offered yields the marketplace can put the acreage numbers on that they got in June.

Each crop year has at least one, and sometime more than one, event that gets the marketplace to rally. These can be export sales like we have seen in the wheat market this year or weather events like droughts or excessive rain.  These events may come early in a season or late.  The key is recognizing the opportunity and taking advantage of it. 

Fixing the basis, and other strategies
So far, my marketing plan has focused on futures and how I market the futures for my crop. But another part of any marketing strategy is fixing the basis. What does “fixing the basis” mean? It simply means bringing the futures quote you get out of Chicago back to a local delivery point, either at the local elevator, an ethanol plant or a soybean processing plant.  Typically, you subtract the basis from the futures quote to get a flat price delivered to a specified point.

While the concept of fixing the basis sounds simple, knowing when to fix it is not. It is important to know the history of your local basis. Sometimes the basis is best right off the combine; other times the market pays you to carry grain to some future delivery date.  Carrying grain just means the market is paying you interest on your money, as well as a set amount for storing the grain. Sometimes the market is willing to pay storage and interest, but this does not happen all the time. When it does, it is usually a good opportunity to fix the basis for future delivery.  This is the basis strategy I use for marketing grain.

 Some of the tools I use to accomplish my sales are Chicago futures, HTA contracts, flat price contracts, and options using “puts and calls.” Depending on the volatility and the year, I use different combinations of all of these to market my crop.  The reason for using the puts and calls is to allow the market to go higher while still guaranteeing a floor on the price. It also allows me to sell crop I may not have if I get hit by a drought.

This year, I used HTAs for 40% of my crop, Chicago futures for 20% and 40% went into put and calls.  

At the beginning of this article, I talked about the changes in agriculture. One of the biggest changes I’ve seen is the hiring of people to help make your farm more profitable. That may be an agronomist, a marketing consultant or a financial consultant.  If they can bring profit to the bottom line , they are worth hiring. That is why I work with Moe Russell and Terry Jones of Russell Consulting. Moe brings his farm credit experience to the business and Terry brings marketing expertise from his 6,500-acre farm in Iowa.  They give me strategy ideas, as well as financial consulting for my individual farm operation.

Best of all, they help keep me focused on the bottom line rather than trying to hit the high in the market. Their goal is getting you the best return on your investment, and I do not know a banker in the world who would not like that.  I know I do.

Wagner puts his farming experience to work as a market analyst with Country Hedging, working with producers to tie crop marketing plans with farm financial objectives in a package that includes an analysis of a farm’s financial health, a marketing plan with gross dollar-per acre targets, weekly marketing updates and net present value analyses on capital purchases. He may be contacted by phone at 1-800-243-3432 or email, swagner@countryhedging.com.