Taming The Bulls & Bears

Should You Be Making 2009 or Even 2010 Sales?

Make your own determination, and always remember that the first sale is not the only sale.

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

Some of you still have problems selling your grain before it is harvested.  You consider pre-harvest sales risky, and prefer to know exactly how many bushels you have before you call the elevator.  

Waiting did work well in 2007 for wheat. But what about the last five years? The last 10 years? More often than not, pre-harvest sales are often the most profitable.  More importantly, they help spread your price risk over a longer period of time.

The problem we face today is the definition of pre-harvest sales.  Most of the farmers in my marketing groups are quite comfortable making sales 18 months prior to harvest, but the futures market is currently trading much more than 18 months in advance.  There are corn futures for December 2010, and soybean and Chicago wheat futures for 2009. 

To add to the intrigue, the prices are pretty darn good that far out.  Most years we would have sacrificed our right arm to have close to $9 soybeans and close to $6 wheat, and now we have those prices available to us.  

I have always tried to market my grain not by price forecasting, but by price need.  I know my cost of production, and if $4 wheat worked on the cash flow, then $5 wheat is just icing on the cake, and $6 is the cherry on top.  There are plenty of people out there who know more than me, and I’ll leave the price forecasting to them. If they think the hot and dry weather will hurt soybean yields, let them rally prices, and I’ll take advantage of it.  I figure it’s my job as a grain seller to stay grounded when everyone else around me seems bullish or bearish.

Which brings us to the question of 2009 sales: Should you sell? So much can change in over two years, but that is a pretty weak excuse.  Change could be $9 wheat, or $3 wheat.  I never accept the fear of change as an excuse not to make sales.  One of the top ten dumbest marketing statements came from a professional advisor who offered this gem: “Due to the uncertainty in the wheat market, we have decided not to make sales.” Does uncertainty mean upside, or downside potential?  The decision not to sell is still a decision.  It is impossible to do nothing in grain marketing.  A decision to hold means you are bullish, and a decision to sell means you are bearish.

Pros and cons of multiple year sales
Market analyst Bob Utterback wrote in commentary on July 31 that “we believe all wheat producers must be looking at multiple year sales now. The problem is everybody wants the nearby big premiums in the deferred commodities. You must be selling the 2008 production in the 2008 contracts. You should diversify your selling strategy, no more than 1/3 in forward cash contracts, 1/3 in straight short futures contracts and 1/3 in call selling at strike prices you would like to sell at. As for defense against upside risk, focus on active selective hedging or call buying once we get into next year. Buy calls against the cash sales, selective hedge the short futures and actively roll up the calls for time value decay.”

I can’t argue with that advice.  However, one reason I have hesitated to sell 2009 crops is input costs. I never imagined fertilizer and fuel expenses would rise so much, and even though it seems unimaginable, what if they continue to rise?  It is difficult to believe that wheat futures over $5 will not be profitable, but it is a possibility.  We have also witnessed what I thought were impossibly weak basis levels in soybeans, so perhaps the $9 soybean hedge to arrive may only be $6 cash.

In talking recently with Grygla, Minn. farmer Todd Stanley, he believes that 2009 soybean sales are a safe bet because input costs are less volatile. “My thinking is to lock up the crops you can control the input costs for. If you have your land locked up, soybean futures look like a good bet at $9,” he says.

To make this debate even more complicated is the fact that I do sell some of our crops three years in advance. We sell our navy beans to Thompsons in East Grand Forks, and we have signed three year contracts in the past.  I checked with Jim Vrolyk, General Manager, to see if my farm was the only crazy one to sign multi-year contracts, but he assured me that a majority of his edible bean growers do sign multi-year contracts.  “I offer multi-year contracts when my buyers offer them,” says Vrolyk.   My marketing decision for 2008 is easy because Vrolyk is currently offering one year contracts for 2008, and not multi-year contracts, but there is time for that to change depending on what the end users want.

The decision to sell the 2009, or even 2010 crop, is your own. I will remind you that you are not officially hedged unless your costs of production are locked, in addition to the commodity price.  That includes fuel, fertilizer and land, which can change dramatically from one year to the next.  

Forward contracting is all about risk management, and everyone has their own risk tolerance.  Some are making out year sales, some are not. Get an opinion or two from a grain market consultant, make your own determination, and always remember that the first sale is not the only sale. Don’t pat yourself on the back if prices plummet, and don’t kick yourself if prices rally.

Jensen puts her marketing strategies to work farming with husband Brian near Stephen, Minn.  Her market education activities including this column are supported in part by the Minnesota wheat checkoff, directed by the Minnesota Wheat Research and Promotion Council.