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Issue 23 |
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Prairie Grains is the official publication of the Minnesota Association of Wheat Growers, North Dakota Grain Growers Association, South Dakota Wheat, Inc. and the Minnesota Barley Growers Assocation. |
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Copyright Prairie |
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Choosing a profitable marketing strategy |
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By Teri Huffaker |
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Producers are faced with a myriad of choices when it comes to marketing strategies. Each strategy has its particular advantages and disadvantages. There are virtually endless numbers of marketing strategies from which to choose. The following charts depict hypothetical results of some of the more popular strategies. For all examples, the following assumptions were made: • Zero basis (cash price = futures price) at the time of sale was used for ease of
explanation. Basis must be considered when evaluating any marketing strategy. • A beginning spring wheat cash and futures price of $3.80 is used and at-the-money strike prices for all put option and call
option examples. Hypothetical premium is 10 cents in all examples, the at-the-money strike is $3.80. For the "sell grain at harvest, buy a call strategy, the chart shows hypothetical results once grain has
been sold at $3.80 per bushel and a $3.80 call option purchased for a future expiration month. Important Note: All prices and examples are hypothetical. This information is supplied for informational
and educational purposes and should not be construed as investment advice. Consult your commodities broker for current contract specifications.
Strategy 1: Do Nothing – Sell Cash Grain at Harvest
This strategy is self-explanatory. Just sell your crop at the prevailing market prices when harvested. Advantages Disadvantages
Strategy 2: Sell Futures
Producers may sell futures contracts to "lock-in" a selling price for wheat.
The dotted line in the chart depicts the cash market. The solid line represents the net price received if a futures hedge is placed. Advantages Disadvantages
Strategy 3: Hedge-To-Arrive/Forward Contract
Private treaty between buyer and seller. Seller agrees to deliver to buyer a
specific quality and quantity of wheat at a predetermined price. Price is "locked-in." The dotted line in the chart represents the cash market. The
solid line represents the net price received under a hedge-to-arrive or forward contract agreement. Difference between hedge-to-arrive and
forward contract: forward contracts typically offer a flat price, basis included; hedge-to-arrive contracts allow seller to lock-in basis at a later date. Advantages Disadvantages
Strategy 4: Buy a Put Option
By purchasing a put option, sellers may establish a minimum selling price
for grain. Put options are paid for up-front, in full (premium) and no margin is required of option buyers. Put options are the right to sell a futures
contract at a specific price and therefore increase in value as futures prices decline. Strike prices are the prices at which the put buyer has the right to
sell futures. The higher the strike price, the higher the put option premium. At option expiration, should futures prices be higher than the put option
strike price the option will be worthless. However, the producer should benefit from higher cash prices when this occurs. Advantages Disadvantages
Strategy 5: Sell Cash Grain at Harvest, Then Buy a Call Option
Many years, prices for grain are lowest during harvest. Producers sometimes choose to store grain with the hope that prices will rally enough
to cover storage costs and increase net returns after harvest. A post harvest rally may be captured and storage costs avoided if a producer chooses to sell grain at harvest and then buy a call option with a future
expiration date. A call option gives the option owner the right to buy a futures contract at a specified price. Strike prices are the prices at which
the call option buyer has the right to buy futures. The lower the strike price, the higher the call option premium. At option expiration, should
futures prices be lower than the call option strike price, the option will be worthless and the producer's net selling price is the cash price minus the
cost of the call. Should a rally occur, the producer will benefit from higher prices as the call option increases in value. Advantages Disadvantages
Five ways good marketers stand out Some producers just seem to stand out from the crowd when it comes to
grain marketing. What are their keys to success? Market experts offer these five characteristics of good marketers: 1. They can sell. "Before the crop is produced, they can sell it and know
how to sell it," says one market expert. 2. They watch and understand how markets work on a daily basis. 3. Producers who successfully market their grain, as one expert puts it,
"take their foot off base and do something." 4. "He isn't in love with his grain," says one producer. "He doesn't get overly emotional. He doesn't let bad decisions eat him up and if he does
something well, he doesn't get cocky about it. He has discipline." 5. They have an ability to know their break-even costs, and the marketing strategies to meet and exceed those costs.
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