Issue 28
April 2000

TAMING THE BULLS & BEARS

Grain selling strategies 2000:   Trigger points for wheat right around the corner

By Tracy Sayler

No one said life is fair—especially when the narrow window for capitalizing on seasonal highs in the spring wheat market often is the same narrow window you have for spring planting.

Nevertheless, barring any major market movers such as poor growing weather, the April-May time period will likely be your best shot this year for winding up old crop wheat sales.  That includes lower quality grain you put in the bin to avoid discounts usually steeper after harvest than in the spring. 

Got corn and beans left in the bin too? Then use the time period between May and June, usually the seasonal high, to sell, unless rallies occur before then.

Use rallies or seasonal highs to incrementally price some of your new crop production as well.

NDSU extension crops economist George Flaskerud has developed suggested selling guidelines—marketing plans, as they're often called—for wheat, corn, and soybeans produced in 2000 (see charts below). 

                                 Wheat Strategy 2000

• Focus on 2/3 of anticipated production
• CFC or HTA first 1/3 when price objectives or time deadlines are reached
• Put options on second 1/3
• Establishes floor on 2/3
• Leaves upside potential on 2/3
• Do not overlook time deadlines for selling

                              Soybean Strategy 2000

• Implement marketing plan using contracts & options
• Lowest price objective assures cash price at least qeual to loan
• Time deadlines extended because of the need to achieve loan on forward sales.  Early deadlines would normally be March-June of the current year.

                      Corn Strategy 2000

• Implement marketing plan using same tools as for wheat
• Lowest price objectives assures cash price at least equal to loan
• Time deadlines extended because of the need to achieve loan on forward sales.  Early deadlines would normally be May & June of the current year.

The plan for each crop focuses on price objectives set relative to a goal. A goal could be to sell in the upper one­third of the price range for the marketing year. A more modest goal would be sell the crop for a price above the seasonal average farm price in your state. That's a seemingly modest goal, but challenging to achieve.

What Flaskerud suggests for wheat: Sell 10% of your new crop wheat if the Minneapolis September futures price reaches $3.70, or by April 19, 2000.  Sell another 25% of your new crop wheat by May 17, 2000, or if the Minneapolis September futures price reaches $3.80 before then.  Sell another 30% by Nov. 15, 2000, or if the Minneapolis September futures price hits $3.90.  Sell another 25% if the price hits $4.50, and if it doesn't sell 25% by Jan. 24, 2001.  Sell the remaining 10% of your new crop wheat by April 25, 2001, or before then if the Minneapolis September futures price hits $5.00.

Use the same selling timelines for durum wheat, but use the price goals of $4.75, $4.85, $4.95, $5.05, and $5.10. Corn pricing objectives are based on the Chicago December futures price, and bean pricing objectives on the Chicago November futures price.  Flaskerud's selling deadline for both new crop corn and beans don't trigger until May of 2001, because of the need to achieve the loan rate on forward sales.

A number of marketing tools can be used to supplement these trigger-based grain selling plans, and the best tool to use depends on the situation.  Flaskerud says the use of elevator contracts as part of your marketing strategy makes farm management sense, especially on that portion of production that can be produced with near certainty, probably the first one-third in the case of preharvest sales.

Cash forward contracts, hedged-to-arrive contracts (sometimes called futures fixed contracts), and minimum price contracts are contract alternatives that should be looked at for making preharvest sales. The best contract for a producer to use largely depends on current and expected futures prices, basis and cash prices.

The put option should be considered as well, because it leaves upside price potential open and does not require delivery, Flaskerud says. Consider using put options where uncertainty is the greatest. In effect, this would be when uncertainty involves not only price but production, probably the second one-third of production sold prior to harvest.

Generally, selling one-third of anticipated production using a cash forward contract or a futures fixed contract, and one-third using put options, manages an enormous amount of price risk, says Flaskerud.  A floor price is established on two-thirds of anticipated production, but the price is still open to the upside on two-thirds.

Don't ignore the time deadlines for selling when prices fail to reach stated objectives, Flaskerud urges.  Even if price objectives have been set unrealistically high relative to outlook information, the time deadlines make the plan realistic. Since the time deadlines are based on seasonal price patterns, the plan is sound and producers can feel that they have marketed strategically, even when price objectives are not reached.

Review and adjust your marketing plans as new marketing information becomes available for each crop.

Flaskerud may be reached by email at: gflasker@ndsuext.nodak.edu