Tips for Selling Grain in Volatile Markets

By Melvin Brees

Volatile markets can make deciding when to sell difficult. Since predicting how high price will go and when the high will occur is uncertain, attempting to sell at a market high depends on luck and is not a realistic marketing goal. Selling in the top 1/3 or 1/2 of the annual price range and avoiding selling at market lows represents a more reasonable approach to marketing.

A number of marketing strategies and sales tools can be used to manage some of the risk occurring in volatile markets. These strategies probably won’t capture the “high,” but they offer opportunities to achieve reasonable price goals and capture profits. It is important to understand that volatile markets can produce surprises and the results of some strategies can be disappointing. However, having a strategy to capture higher prices usually beats having no strategy at all.

It just makes sense to not sell everything at once when markets are volatile and uncertain. Unexpected events can quickly change the price outlook. Selling a portion of grain inventory at favorable prices insures that some is sold at profitable prices. If prices increase, more is available for sale and when sold at higher prices increases the average price of grain sold. Similarly, if prices decline, some grain has already been sold at higher prices and provides a higher average price by offsetting later sales as prices decline.

Having a price goal tends to make selling somewhat easier. Using upside price targets together with spreading of sales allows following a market uptrend with “scale-up” sales. When a higher price target is reached, a portion of the grain is sold. If prices continue to increase, additional sales are made at higher price targets, resulting in increasingly higher average prices. Price charts or technical analysis can be helpful to identify price targets. Setting price targets at or just below technical price resistance is one method of identifying price goals. Resistance prices represent earlier price highs that previous rallies failed to exceed or where prices “resisted” going higher.

In volatile markets, having downside price targets or “price traps” is also important. While everyone likes to focus on upside price targets, being prepared to make sales if the market declines can help salvage higher average prices early in the price decline. These sales are difficult to make because prices were recently “better,” but the objective is to capture favorable (or at least decent) prices before prices decline to much lower levels. Setting price traps just below technical price support (previous price lows where prices reversed and moved higher) or below chart uptrend lines are two possible methods of identifying price traps.

Cash sales or forward contracting for later delivery of remaining old crop inventories are the most common method producers use to spread sales and capture price goals. The same techniques for identifying sales targets can be used to liquidate futures contracts or call options purchased to re-own previous cash sales.

The same price targeting methods can be used to establish price objectives for pre-harvest sales of production expected to be delivered at harvest time. Other objectives such as setting price traps that produce returns above production cost/return break-even may be given higher priority in pre-harvest sales. However, production risk associated with delivery requirements and potentially weak basis bids may sometimes make new crop forward cash contracts less appealing.

Hedging by selling futures contracts or buying put options can avoid delivery requirements or weak basis, but margin requirements on futures positions or high put option premiums may be worrisome to some. More complex option strategies (covered calls, fences, bear-put spreads, etc.) are recommended by some market advisors and offer some attractive ways to mange price risk and lock-in favorable prices at a low net option premium cost. While these can be very effective risk management strategies, it is important to understand how they work and the potential financial or contract obligations associated with them.

Brees is a University of Missouri extension ag economist. 

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Marketing Doesn’t Have To Be Complicated To Be Profitable

As I often recommend, consider placing sell orders at your local elevator or with a broker. It’s much too difficult to try to watch the markets every day, and the direction may change drastically from open to close. A “good til cancelled” order can help ensure that your marketing plan is executed. The GTC is a directive to sell at a specified price which remains in force until executed or cancelled by you, the customer.

If you want to sell wheat at $5.75, then call your elevator manager and tell him to sell at $5.75 “good ‘til cancelled.” That order will remain active until you cancel it, so if wheat rallies when you are busy with other things (like deer hunting, for instance), your order will be filled without your constant attention.

If you don’t have the time, interest, or comprehension of grain marketing, then try to keep it simple.  Sell incrementally, especially when prices are usually at their seasonal highs. Ignore put and call options or other futures strategies that might be confusing to you. Place a “good ‘til cancelled” order with your grain merchandiser to sell at a particular price. 

Knowing your cost of production – which can generally be calculated by dividing total cost (farm and family living expenses) by average or expected yield to arrive at a per-bushel-yield price – will help you arrive at a selling price you are comfortable with.  Grain marketing doesn’t have to be complicated to be profitable.

– Betsy Jensen, Ag Commodity Instructor, Northland Community and Technical College

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Look at Deferred Futures Contracts for Selling Signals

A producer can make some sense out of markets that are in ‘rock and roll mode’ by looking at deferred future contract prices, suggests Mike Woolverton, Kansas State Extension grain economist.

There are four December corn contracts on the board; 2007 through 2010. At about $3.60 as of Aug. 24, the Dec. 07 contract is the only one below $4.00. All are well above the long term average price for corn. It might be a good business decision to lock in profits on parts of this and future year crops now, he suggests, and the same can be said about soybeans for 07, 08 and 09. While it looks as if the soybean price will remain high; and it might go to $10 per bushel sometime during the next three years, it could also fall to below the cost of production.

Wheat deferred futures contracts tell a different story, he warns, one with some urgency attached. The Sept 07 Kansas City wheat contract price is about $1.00 higher than the July 08 price and more than $1.00 above July 09 (as of Aug 24). The market is pricing wheat at shortage levels now, but the shortage is likely to be alleviated by harvest time next summer, followed by even more wheat production the following year. The message from the market to producers is clear, Woolverton says: lock in price on as much 08 and 09 wheat as possible now or expect to get at least one dollar per bushel less next July; even less the following July.

For more updates and information, go online to www.agmanager.info – click on the ‘Crops’ link.