Copyright Prairie Grains Magazine
February 2001

Taming the Bulls & Bears

Start Grain Marketing Early to Avoid Expensive Mistakes Next Fall

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

The snow is blowing, the wind is howling, temps are near (or below) zero, and the only machinery moving on the farm is the snowblower. Spring couldn’t seem farther away, but it’s just around the corner, and it’s time to get everything ready for planting. Many farmers are purchasing seed, fertilizer and maybe even some chemical. Rental contracts are being negotiated and crop insurance needs to be purchased by March 15.

Without even planting a seed, farmers have already been working hard to produce the next crop. But are you working just as hard to market that crop?

Most farmers prefer to concentrate on production, but working just as hard on marketing can lead to even bigger rewards.  It’s important to start thinking about grain marketing very early in the season. Why use six months of prices when you could market your crop over 12 to 18 months instead? You don’t have to make any sales right now, but you should at least begin to put some price targets down on paper, and start talking with your elevator manager about what you would accept for a basis this fall (You do know about the basis, don’t you? If not, now’s a great time to study up on it. If you belong to a marketing club, suggest spending time discussing it). 

If you start marketing your grain early, you can avoid several expensive mistakes this fall.  It’s very expensive to store wheat, and early sales can help minimize the need for storage. 

Harvest sales are not recommended because of the weak basis and extreme discounts, but any grain sold against the December 2001 contract can be delivered in early October. You need at least three cents per month to cover your storage and interest costs for wheat, so if you store from Oct to July, you need a 30-cent rally just to break even.  That’s expensive storage and if wheat prices drop 30 cents, you’re actually down 60 cents once you add your storage expense. It’s expensive to store grain, and forward contracting allows you to become a “price maker” instead of a “price taker.”

Seasonalities also play a big role in forward contracting. The grain markets typically rally in April and May as traders begin to see potential crop problems.  Those problems occur every year and rarely amount to anything, but yet the market still rallies and gives you some great chances to sell your crop.  Of course, you can always use the spring rally to sell old crop grain as well, but then we’re back to expensive storage.  It’s much easier to plan ahead than try to play catch-up later on.

The large carrying charge also encourages forward contracting. The carrying charge disappears and the only way to take advantage is to sell today for deferred delivery. That carrying charge will disappear by the time you deliver on the contract, but at least you planned ahead and took advantage of the carrying charge early in the year.

Forward contracting—how much?
Now that you have decided that you need to forward contract, the next major decision is “how much?”  If you use crop revenue coverage insurance, you can confidently sell up to your guaranteed production.  If the crop is a disaster and prices rally in the fall, you will have to reown your contracted grain, but you’ll receive a CRC indemnity to cover the expense.

If you don’t use CRC insurance, and want to play it safe, contract 25% to 30% of your expected production before you plant.  There will be years that you will not produce even a bushel, but those years are rare. If you’re afraid to contract anything just in case you don’t produce, you’re putting yourself at a major price disadvantage.  You’ll be unable to take advantage of the spring rally, and you’ll be forced to pay storage on 100%, or sell at harvest and receive the poor basis and big discounts. 

If prices are just too good to resist in the spring, start buying some September put options. You don’t have to deliver on the contracts, and if prices rally, you’re only risk is the premium you paid.  If you would be happy selling 100% at the prices offered this spring, then sell 30% and buy puts on the last 70%. 

Forward contracting is a good idea to spread your price risk, and crop marketing should be about minimizing risk while maximizing profits.  It’s not risky to forward contract your crop. It is risky to hold 100% unpriced while you enter a growing season with even more risks.

“Taming the Bulls and Bears” is a market education feature of Prairie Grains, made possible by the Minnesota wheat checkoff managed 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, send it to: Minnesota Wheat Council, Attn: Prairie Grains editor, 2600 Wheat Drive, Red Lake Falls, MN, 56750. Phone: 1-800-242-6118. Or email Jensen: bjensen@nctc.mnscu.edu.