Taming the Bulls & Bears

What’s Riskier Than Pricing Grain? Not Pricing At All

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

Whenever I discuss marketing strategies with farmers, such as forward contracting or selling futures, I’ll usually get a question that, one way or another, stems from a primal fear among them—that using a particular selling/pricing tool is too risky.

“What if prices go up?” is one common question, and it is indeed a valid concern. No farmer wants to sell wheat at $3.25, only to watch prices rally to $4 in the fall.

Forward contracting is scary.  I agree with that 100%. We typically get a strong rally in April and May because of weather concerns. It’s too dry, too wet, or there is some other crisis that threatens crop production. The market gets scared, prices rally, and then suddenly the weather scare is over and prices fall just as quickly as they rose. 

So how can you tell if a weather scare is going to amount to a valid problem, or if it will turn out to be just a scare?  I don’t think you can.  Long term forecasting is not an exact science, so even if you hear a weather expert talk about a drought, take it with a grain of salt. We are overdue for a major drought in the Midwest, but we’ve heard that for several years now. (Think back two years ago to El Nino and how the drought was almost guaranteed.)  You can’t predict Mother Nature, much less rely on her to take care of your grain marketing.

Keep this in mind when marketing your crop.  In 2000, the Dec contract consistently traded with a 40-cent range between $3.20 and $3.60 (I took off the highs and lows). Put a 40-cent range on 50,000 bushels and you end up with a $20,000 swing. Can you afford to lose that $20,000? The point is, a good marketing strategy can make the difference between making a profit, and not making a profit. It’s not easy to make money growing wheat, but wheat can be profitable.

If the market is rallying, it’s a bull market and that makes it even harder to sell.  It takes a strong stomach, and a few rolls of antacid to sell in a bull market, but you need to focus on minimizing risks. If $4 wheat looked good a month ago, why doesn’t it look good now?  Can you afford to hold 100% of your wheat unpriced if prices do drop? If prices are above your projected break-even costs, it provides an extra incentive to forward contract or buy puts.  You’ll never go out of business by making a profit, and selling wheat at profitable levels has been hard to do for the past few years. If profitable prices are seen this spring, don’t make the mistake of letting those prices slip through your fingers. 

It’s very risky to hold 100% of your crop unpriced as we enter the growing season.  Prices can go up, go down or stay steady, and you have to be prepared for all three scenarios.  Combining forward contracting with buying puts or CRC insurance is a great way to protect your crop from falling prices.  To take advantage of higher prices, forward contract 1/3 of your crop, so you still own 2/3 of it if prices do rally.  You can even sell 100% of your crop, and then buy Sept or Dec call options to protect yourself if prices do rise.

If you choose to hold 100% of your crop unpriced, you are putting yourself at great risk if prices fall.  You can find good marketing advice from a lot of sources, and you can find several different opinions.  Even the so-called experts can’t agree on where the market is going.  There has to be a bull for every bear in the market so for every bullish argument, you’ll find an equally persuasive bear argument.

Pricing grain can be risky. But not pricing your grain can be even riskier. Risk minimization is what you should strive for. The markets are just like the weather: we can guess what might happen, but not with absolute certainty. All we can do is follow the weather and do the best job of managing it with the tools that are available. When you bring along an umbrella, you’re essentially hedging that it might rain. You still might get a little wet if it does rain, but you won’t get soaked. So too with grain pricing strategies. They’re not perfect. But used in a timely, effective manner, they’re more likely to keep you dry than get soaked, just like that umbrella.