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Your Grain Marketing Multi-Tool

Are you thinking more and more about new-crop grain marketing?

Maybe you’ve wanted to make some sales up at these levels but are concerned about another dry year with the associated production concerns. Maybe you just believe prices are still going higher and want to be patient, but worried in the back of your mind that these price uptrends could reverse.

These will be just a few of the many marketing challenges over the next several months.

A recent article I read highlighted that better marketing is something many farmers would like to accomplish. There are important marketing issues like risk tolerance levels, technical chart and trends analysis as well as fundamental market research to better understand the supply-and-demand factors that impact prices.

But it’s when you marry solid market analysis with various option revenue management strategies that one plus one can equal three to give you an even higher probability of improving your commodity marketing.

What does better commodity marketing look like? Over the years, and especially this past year, rarely does better marketing mean picking the top of the market. Rather it’s having the tools in place to provide flexibility and adaptability to balance production risks along with pricing, storage and delivery decisions.

While the marketing process is different for everyone, it’s ultimately about converting your grain assets in to cash so there are some common themes.

I’ve heard many comments like, “If weather co-operates and we get good yields, these high prices may not last!” “I must admit, I have no grasp on how to market or what’s the best thing to do… ” or, “I certainly won’t be locking in very much new crop,” and, “I’m going to use a lot more options next year.”

So, as the calendar year turns and we start thinking more and more about new-crop marketing, it’s important to realize why option strategies will be a marketing necessity again this year.

Think of options as protection for your grain or livestock revenues kind of like crop insurance or equipment insurance protects your other assets. Also, keep in mind that options don’t replace what you already do in the cash market but rather work in conjunction with physical sales. They let you defend a physical sale or protect grain in the field or in the bin while still participating in the upside if the market moves higher. As we go forward this new crop year, here are a few things to think about.

• Essentially, options strategies let you establish a minimum floor price which gives you the downside protection you need, the upside potential you want, all without having to commit your grain for delivery so you can manage your production risk. How do you think this would help you make marketing decisions given the uncertain production conditions and volatile markets?
• Growers often sell early to secure delivery space, for storage capacity and cash flow reasons or to avoid spoilage. So wouldn’t it be nice to know you can replace physical sales with a low-risk option position that will gain if prices go higher?
• Does the ability to separate your pricing and delivery decisions make you feel like you have more control in your hands? Wouldn’t this be nice to use when you make your marketing decisions?
• The ability to protect physical sales and replace cash contracts with options is something that producers really like. Do you think that will help you manage your production risk?
• Many of your business stakeholders can profit from these marketing tools as well. Think of the benefits your banks and lenders as well as other business partners are going to have knowing you have additional risk management tools.

Bottom line, there are many ways to become better at commodity marketing and certainly one is through the use of option hedging strategies that enhance your physical sales. Option hedging strategies are like the Swiss army knife of marketing tools.

So, if there was ever a year to use flexible option strategies to better manage both price opportunities and production risks, this is the year.

David Derwin