Taming the Bulls and Bears

From Wine & Roses to Sour Milk & Dandelions:  Managing grain market conditions quite different from last spring

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

Oh how fun it is to reminisce about marketing in the good old days – last year at this time. Fuel and fertilizer prices were a little high, but with favorable commodity prices we could still pencil in some profits for 2004 using average yields.  We were able to purchase crop insurance that actually provided a respectable revenue guarantee.

Fast forward to 2005 – suddenly the land of wine and roses has turned into sour milk and dandelions. 

It’s difficult to get excited about marketing in 2005 after the exceptional prices we saw in 2004. Unfortunately, no amount of reminiscing, whining, complaining, begging or pleading is going to convince the markets to give us one more shot at the price levels we saw last spring.  We had our opportunity at easy money, and now we’re back to struggling for every penny we can squeeze out of our farm.

It’s not like we haven’t dined on sour milk and dandelions before. We need to put on our big boy/girl britches and deal with it.  Here are some ideas to deal with the low prices we have in 2005. 

The first rule for selling in 2005: never forward contract below the loan rate.  I know many farmers are going to argue about selling below the loan rate and then collecting a big LDP when prices decrease, but let me warn you: It’s not worth the risk.

When marketing your crops, it is often difficult to determine right from wrong because sales can look good and bad within the same week, but selling below the loan rate is just plain wrong. I am not at all wishy-washy about that.  The government has provided the loan price as a minimum.  Oh, if you work hard enough, you can actually sell your crop below that minimum. Don’t do it! Every marketing year is full of regrets; sold too much, didn’t sell enough, but none of those regrets can compare to the pain of selling below the loan rate and watching prices go higher. 

Be sure to watch your local basis, the difference between your local cash price and futures prices.  That’s where the movement has been. It fluctuates , becoming weaker or stronger, depending on various market factors.  There are strategies in taking advantage of your local basis.  For example, you can lock in the basis any time by signing a basis fixed contract guaranteeing so many bushels will be delivered by a specific date. Locking in the current basis and a future’s quote later is similar to cash forward contracting. Make it a point to discuss basis strategies with your local elevator manager/merchandiser and/or marketing group before you pull the drill out this spring.

Another rule for 2005 is to expect the unexpected. You probably won’t find a more bearish person than me, but that doesn’t mean I’m selling my entire crop today. All of the news I read and hear is bearish, emphasizing that it is time to throw in the towel and give up on 2005, but I’m not listening .  I keep reminding myself that there is still snow on the ground. I’m not going to try and predict what Mother Nature will dish out this summer. The crop we produced in 2004 was large enough to rebuild stocks so a major rally is not likely, but we may be able to muster some sort of rally.  If we do, be sure to make some sales.  If prices remain below the loan rate, don’t make sales. 

The big rallies we saw in 2004 also meant a change in the futures prices.  The futures markets were flat (Sept, Dec and March were the same price) or even inverted (Sept was higher than Dec, which was higher than March).  Now that we have returned to decent levels of stocks, the markets are developing a carrying charge (March is higher than Dec which is higher than Sept).

Think back a few years to when we had a carrying charge, and how it affected prices. If we have a carrying charge in the market, it means you need to sell in advance, assuming we’re over the loan rate.  The carrying charge slowly disappears, and the only way to take advantage of it is to sell in advance.  If you see a carrying charge develop, it’s one more incentive to get the crop sold in advance.  If we harvest a big crop and have a carrying charge, you can collect an LDP, sell the carry, and receive a price that is better than the loan rate.

Remember that in the Northern Plains, the 2004 crop year started with big potential, but ended with a fizzle.  We had high prices and high hopes, but we ended the year with big discounts for our wheat and frozen crops. The 2005 crop year is not starting with much potential, but you just never know how it might end.

The best tip I can offer for 2005 is to scale back your marketing plans, and take advantage of small rallies, instead of waiting for a rally that is similar to 2004.  There will still be profitable opportunities available in 2005, but they’ll probably make a quick appearance.  We’re going to have to work hard to find those profitable opportunities – the wine and roses – but they’ll come.  Take advantage of them when they do.

Jensen farms with her 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. If you have a question or topic related to marketing that you’d like to see addressed in this feature, call 1-800 -242-6118, or email Jensen: betsy.jensen@northlandcollege.edu .