Your Grain Selling Plan:

Revise It When Prices, Production Change

By Mike Lockhart

Given the dynamics of the markets this summer—as opposed to the last few years, where the focus was more on catching peak LDPs—many grain producers are second-guessing their marketing plans (you do have a plan, don’t you?)

Re-evaluation might be a better way of putting it. Since market conditions can change rapidly in unexpected directions, your marketing plan (or if you want to get more descriptive, “selling plan”) should be evaluated and modified periodically. And if adjustments aren’t made, you might end up with strategies in your plan that are inappropriate for current trends or conditions.

Price movement is a key reason to modify your plan.  The present price movement higher has some of us wishing we had not followed our selling plan earlier this summer.  Another key reason is production. For instance, we may have fewer bushels to harvest, and so is that 60% forward contract we made earlier in the year now 100% of our expected production?   Other reasons why we may want to make adjustments to our plans may have to do with timing, spring expected crop versus fall actual crop, storage availability, premiums and discounts, and so on. When reviewing your plan and contemplating whether to change it, ask yourself: Does the plan continue to be realistic? Does it reflect your average farm yields and cost of production?  If it does, now consider what has changed:

Price: As long as the above cost and yields remain the same, then a move upward in price on the remaining crop will only improve your outcome. 

Production: Reduced yields will change both of the above.  Remember, the market isn’t going to give you a 30% higher price just because you had a 30% loss from too much (or too little) soil moisture, so be realistic in your selling objectives.  If you have over-contracted, talk to your elevator manager and let him know the situation.  As prices go up, farmers sometimes try to get out of contracts so they can sell at a higher price somewhere else, which really makes elevator managers upset, and understandably so. However, I’ve found that if you have a real problem, they’ll try to help as much as they can.

Let’s face it, sometimes you might have to buy back a contract.  If it’s a basis contract, then the cost is only the difference between your basis and the current basis. If it is a forward contract, then it’s the difference between your price and the current price.

So how can you change your plan without throwing the whole thing out?  If prices change, consider revising the quantity of incremental sales you have in your plan; ie, change the amount of each sale from 2,000 bushels of wheat to 1,000 bushels at each price level.  Or, change the price objective between each sale; say from 10 to 25 cents between each sale.  Either way, your selling plan stays on track.

To sum up: reevaluate your marketing plan when the market is volatile, or takes a different direction, and when there are changes or uncertainty in production or production conditions.   Review your plan at least once a month (but no more than once a week), unless market conditions or changes in your individual situation dictate otherwise.

It is difficult to make a realistic plan and stick to it in a down market. Mostly, it’s an “avoid” selling plan instead of a realistic marketing plan.  On the flip side, while the excitement of a runaway weather market is hard to beat, selling most or all of your entire crop at the top of a rally can be just as stressful. If you have priced most of your crop and the price is still going up, then look at pricing some of next year’s production. By doing a hedge-to-arrive, for instance, you have started pricing higher than most of your grain sales this year, and that’s good. For instance, there are some 2003 prices for corn and wheat lately that beat anything we’ve sold in the last four years. Let that be the first sale of the marketing plan for your 2003 crop.

Lockhart is a Ulen, Minn. farmer, marketing group coordinator, and instructor with the Northwest Minnesota Farm Business Management program coordinated by Northland Community and Technical College, based in Thief River Falls, Minn. 
His email: mlockhart@nctc.mnscu.edu .

Grain Selling Tools and When to Use Them

Cash Sales (grain delivered) ...Use when:
• Price in upper 1/3 of price range
• Basis narrow or normal
• Expected price drop seasonal or cycle

Cash Forward Contract ...Use when:
• Price in upper 1/3 of price range
• Narrow or normal basis
• Price above cost of production

Futures (sell position…short) ...Use when:
• Price in upper price range before crop is ready to sell
• Basis wide (means cash is weaker)
• Price movement is unknown or expected to go lower

Future Fixed or Hedge-to-Arrive ...Use when:
• Price is high
• Basis wide
• Price above cost of production

Option (puts) ...Use when:
• Price is high
• Basis wide or unknown
• Unknown risk with price or yield

Delayed pricing contract (grain delivered) ...Use when:
• Price low
• Basis movement unknown
• Expected price to move seasonably or cycle higher

Basis Contract ...Use when:
• Price low
• Basis narrow or plus
• Expect seasonal or cycle highs coming

Storage ...Use when:
• Price low
• Basis wide
• Expected price move higher seasonally or cycle
• Storage available

Government Loan ...Use when:
• Price low
• Basis wide
• Discounts in the market
• Storage available

Futures (buy position…long) ...Use when:
• Price low
• Basis wide
• Basis expected to narrow
• Trend up seasonally & cycle

Option (calls) ...Use when:
• Price low
• Basis narrow
• Trend up seasonally or cycle

Min. Price Contract (grain delivered) ...Use when:
• Price low
• Basis narrow
• Trend up

Source: Mike Lockhart, NCTC Farm Business Management