Issue 27
March 2000

Taming the Bulls & Bears

Is marketing on your spring thaw checklist?

By Betty Thom

It's been a dry, mild winter.  Fast forward a few weeks, and the fields are almost dry enough to get into. Let's see, are we ready to roll? Change oil in tractors and truck—check. Drill calibrated and prepared—check. Fertilizer purchased for small grains— check. Seed conditioned and ready in truck—check. Marketing plan in place…Oh-oh.

Only 10-15% of farmers have a marketing plan, according to industry experts. Yet financial advisors know farmers with a marketing plan have a much better chance of succeeding.

Before a single kernel is planted, a basic marketing plan should be made, according to Mike Lockhart, an instructor with Northland Community Technical College's farm business management program, and a Ulen, MN producer.

"There is more money made in marketing than in production," he says. "The worst time to sell grain is when we need it. Farmers have become so predictable. They sell at harvest because they need cash, in November to pay the rent and in February to pay the taxes. I think those buying the grains have figured this out and take advantage of the easy market."

"Developing a plan doesn't have to be complicated," says Lockhart, who leads several marketing clubs in western MN. "First you need to know what your breakeven point is for each crop you plan to grow. That includes covering your living expenses. It will probably take about three to four hours of figuring."

"Then set your goals. I like to talk about the 'Walmart stategy' in our marketing clubs. Walmart sets their prices about 20% over breakeven. And we all know Walmart is doing well. Farmers sometimes are afraid to market their grain because they have the idea they should wait until the market hits the top. In the meantime opportunities are missed to make a very decent living even in the tough years."

But, if you wait to sell your grain until you need the money, you are narrowing your selling opportunities. He compares the situation to shooting a gun at a target. With a .22 rifle, you'll have less chances of hitting it.  Use a shotgun, however, and your odds are greater. "It's the same concept with marketing your grain. Your chances of receiving your target price definitely increases if you market 10 months before and 10 months after the harvest," Lockhart says.

Your marketing plan should include tools that will help you reach your goals.

"This year I would look at three components equally in setting up the rest of the marketing plan. I'm counting on the government program, loan deficiency payments (LDPs) and locking in the basis," he says.

The basis is the difference in price between the local cash price and the futures price during a specified delivery month.   The basis will usually be larger (more negative) during harvest, because of the larger supply of grain compared to demand. On the other hand, the basis is usually smaller (more positive) during spring planting because farmers are not hauling their grain; thus the supply is low compared to demand. (Learn more about the basis in the 1999 Prairie Grains Marketing Guide, online at (www.smallgrains.org/springwh/MGuide99/Sales/sales.htm).

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, Lockhart says.  Locking in the basis now and a future's quote later is similar to cash forward contracting, he says.

"Usually spring is a good time to look at locking in the basis based on the Dec. Minneapolis futures. Look at locking in the basis for 25-50% of the wheat and bean projected yields.  If the future prices get above the loan price, I would consider locking that in too," Lockhart says. "The prices may make a seasonal rally around May. Of course, weather reports for South America and the winter wheat belt will also be affecting prices."

Incremental sales on seasonal cycles

George Flaskerud, NDSU extension crops economist, also suggests taking advantage of seasonal cycles in a marketing plan, and selling incrementally when certain price levels or timelines are triggered.

An example of a 2000 wheat marketing plan would be selling 10% of a wheat crop when the Sept. futures price reaches $3.70 on the Minneapolis Grain Exchange or April 19, whichever comes first. Another 25% would be sold when Sept. quotes reach $3.80 or May 17, whichever comes first. These prices can be locked in with a futures fixed contract.

Purchase put options based on Sept. or the nearby futures for an additional 30% when the price reaches $3.90 or by Nov. 15.  If the prices rally you can sell more.

With a put option, a farmer has the right, but not the obligation, to sell a futures contract at a specific (strike) price and there is no delivery obligation.

Corn can be marketed at the same percentages and time deadlines with $2.50, $2.60 and $2.70 as your target prices using Dec. futures. Look at Nov. futures for soybeans with $5.60, $5.75 and $5.95 as target prices, Flaskerud says.

Hedging the futures market locks in a futures price but not the basis. Ray Grabanski, president of Progressive Ag Marketing, Fargo, advises farmers to hedge prices when the price is above the government loan rate. Corn should be at least 20 cents above loan, wheat should be 30–40 cents above loan and soybeans should be 30-40 cents above loan, he says.

"I would use caution when contracting specialty crops," Grabanski says. "It is difficult to contract much volume without an 'act of God' clause protecting the yield or quality." 

 Lockhart says that once a marketing plan is set up, it usually takes 10 minutes daily to listen or watch the markets.  Marketing classes and clubs are forming all around the area to help farmers learn from each other, and to help make better selling decisions.

"If you don't feel comfortable marketing yourself, there are several companies or individuals you can hire to help you," Lockhart says. "The important thing is to take advantage of the bigger window of pricing, especially now during a depressed farm economy. If you have a good marketing plan you can make money. Fifty cents or a dollar per bushel more than the cash price will make an enormous difference."