By David Swindford

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Prairie Grains is the
official publication of
the Minnesota
Association of
Wheat Growers,
North Dakota Grain
Growers Association,
South Dakota Wheat,
Inc., and the
Minnesota Barley
Growers Association.

Hope is always present at planting time regardless of price. When mother nature puts her world in bloom, how can you doubt that this will be the crop to end all crops? The farmer has both production hope and price hope.

Hope usually lingers until the price starts up, and then greed sets in. The thinking is that the price has to go up — it did last year, right? Sure enough, planting scares, floods, drought, and uncertain crop size usually make the futures price jump some time during the crop year.

Are we ready to capture this opportunity? Heck no! They will have to pry this wheat out of my dead hands! No one will get my wheat for less than $5.00 a bushel. Greed is set in concrete. Farmers tend not to sell on an up market. If the market starts down, he waits. He’s not going to let them steal his wheat.

Then the price keeps going down, down, down. His banker tells him to sell, his wife threatens him with divorce, his doctor tells him he will die from stress, and finally, fear causes him to sell. This scenario happens to the farmer or livestock producer each year if he does not develop a risk management marketing plan.

What kind of plan should be used? I recommend the following:

1. Determine the cost of production. If the cost is not known, you might sell too cheap.

2. Determine your five-year yield on each farm. Take 80% of that yield and calculate the maximum contractable bushels.

3. Draw a grain bin on a piece of paper and divide the bin with lines at each one-third level.

4. Market the bottom one-third of the bin at any time you can get your cost of production plus a reasonable profit. (By "market" I mean forward contract to your local elevator or processor. Leave the price risk up to them.)

5. Move to the next one-third of your grain bin. This one-third should be hedged (selling of futures) instead of actual grain when prices reach a desired level. In effect, this will lock in a price for later delivery when the actual cash grain is delivered and sold so that the futures would be purchased.

6. The final one-third of your grain can be hedged by buying puts (a right but no obligation to buy futures) at a profitable level. This provides a minimum price but allows for the price to go up. You sell your grain and yet benefit if the price goes up. Delivery is not required in case of failed production.

If you have an average crop, this will allow 20% not previously sold to move into the market at anytime it becomes profitable and complete your sales.

The most important aspect of any marketing plan is having it written down and execute it without second-guessing yourself. If needed, instructions to market your grain at specific values can be left with your broker or buyer so you can go about farming.

Risk management sounds so simple yet many find it very difficult to give up that human element that follows the hope, greed then fear theory embedded in our souls. I maintain that there is greater leverage in selling then growing the crop, rather than growing the crop and waiting to see what people will give you for it.

Swinford is a Texas crop producer and state lawmaker, who was a featured speaker at this year’s USDA Ag Outlook Forum. Attend the joint ND-MN Wheat and Barley Growers Convention December 8 for more information on strategic decisions that help make for successful businesses. Program details on pages 8-9.