Tips for Better Grain Marketing

Understand the limitations of price forecasting
No one can predict price accurately and consistently; grain marketers should recognize this. Over reliance on price forecasts can have disastrous results. Similarly, farmers should not second-guess not getting the highest price for their grain. A more realistic marketing objective would be to sell in the top one-third of the yearly price range.

Since accurate price forecasting is impossible, incremental selling is recommended. Too many producers make all-or-nothing selling decisions; they either sell the entire crop or leave it all unpriced. Many farmers may do an excellent job of producing the crop, but then lose revenues through inefficient marketing. A preferred marketing strategy is to sell the crop in increments. For example, sell 10% now, 10% later, 15% still later, and so on. Such a strategy does not ensure the highest price for the farmer’s crop, but it reduces his or her risk of losing an entire year’s profits because of a single poor marketing decision.

Understand and follow the grain markets closely
An understanding of domestic and world balance sheets is a necessary first step to marketing grain effectively. A comprehension of local market conditions and basis is equally crucial. The astute grain marketer should obtain local cash prices and record important basis information at least weekly. It is recommended that farmers obtain price forecasts from a minimum of two or three different sources. Farmers should subscribe to a good charting service, and at least should study the futures charts on a weekly basis—daily is even better.

Be familiar with the terminology of grain marketing
Grain farmers must understand the language of marketing. They should be as familiar with grain marketing terminology as they are with production terminology. Put, call, strike price, premiums, intrinsic value, basis contract, deferred pricing contract, short, long, hedge, inverted market and strong or weak basis ought to be familiar terms to farmers concerned with effective grain marketing. The producer’s failure to comprehend grain marketing terminology puts up unnecessary barriers to effective marketing.

Be familiar with the types of marketing alternatives offered
An understanding of the available grain marketing alternatives and their related advantages and disadvantages, is a prerequisite to effective grain marketing. Not all grain marketing alternatives will meet every producer’s needs. The suitability of varied alternatives for each individual producer depends on the person’s understanding of the different available alternatives. As a farmer becomes more and more familiar with the different marketing alternatives, the probability that he or she would make correct marketing decisions increases.

Have a thoughtful, written marketing plan
A grain marketing plan is essential to effective producer marketing decisions. Ideally, the plan should have been completed before the grain is planted. Also, the farmer periodically should update the plan. Plans can reduce some of the emotions associated with marketing decisions; thus, they foster objectivity. The planning process forces farm decision-makers to thoughtfully consider the grain markets. Written plans improve communication and lessen family disputes. They can be useful when the farmer has to apply for loans. Without a marketing plan, a farmer deprives himself or herself of a means to evaluate past marketing decisions—an essential tool for improving marketing performance.

Consider all costs when making marketing decisions
The producer must consider all variable costs when marketing postharvest grain. Most farmers will incorporate at least some of the storage costs to determine a net price after storage; however, too often they overlook interest, shrinkage and some other costs. These omissions are significant. To effectively evaluate preharvest and postharvest prices, all costs must be considered.

Understand the futures markets
An effective grain marketer must understand the futures markets and the mechanics of using these to hedge grain. The futures markets offer grain producers the opportunity to lock in a price, subject only to basis risk. Additionally, they often offer incentives for producers willing to hedge directly in the futures market instead of indirectly through cash forward contracts. Since the futures markets are traded as much as 15 months in advance, they extend the marketing year from a few weeks to 15 months—allowing producers to take advantage of frequent temporary price increases.

The futures markets also offer a balanced consensus of what grain traders think future grain prices will be. The practice of following and charting futures prices daily is recommended. Analyses of why prices were strong or weak on a particular day, are one of the most efficient methods of gaining an education on the grain markets.

Understand the options markets
Options offer new and unique opportunities. Farmers should understand the options markets if they are to take advantage of these openings.

Options allow farmers to buy insurance against adverse price movements without taking away the benefits associated with favorable price movements. Buyers of options do not have to put up margin money, as in the futures market. They do not have to worry about having sufficient cash to meet margin calls. Also, options buyers do not have any production risk associated with their marketing decision. Should their production be less than expected, options buyers are not committed to deliver grain or offset their position. The ultimate value of options to the producer depends upon the cost of the insurance (the premium which changes daily) and the risk of adverse price movements.

Track the value of the total crop
Track the value of total or expected crop production.  Use records or software that incorporates all revenue associated with a grain crop, such as: cash sales, forward contract sales, futures hedges, options hedges and government payments. Whatever method you choose, it should encourage you to focus your attention on changes in the entire value of the crop, decreasing the likelihood that you will focus on a marketing decision which encompasses only a portion of the crop.

Evaluate all marketing alternatives
To make appropriate marketing decisions, compute the effective selling or minimum effective selling price for all marketing alternatives. Failure to do this almost ensures that a farmer would make inappropriate and/or ineffective marketing decisions. He or she would be making decisions based on incomplete information.

When evaluating all marketing choices, also take into account factors such as: the farmer’s financial situation, his or her attitudes towards risk, and his or her knowledge level of marketing. But in all scenarios, price is important.

By James R. Russell, agricultural marketing specialist, and Jim Hanson, farm management specialist, University of Maryland Extension Service. More information on these and other grain marketing points can be found in a series of 15 grain marketing fact sheets online at www.agnr.umd.edu/MCE/Publications/ .  Click on “Ag Economics and Finance.”  One of the fact sheets (FS494) that relates to tip number nine in this article contains a crop pricing summary (CPS) worksheet, which a producer can use to record a crop’s potential and actual value throughout the crop year. The CPS worksheet indicates five ways to handle grain for the market: unpriced, sold for cash, contracted for future sale, hedged or priced through options. The worksheet also helps keep track of farm program payments.  This fact sheet also contains futures and options worksheets that can be used to summarize hedging transactions.