Chip Flory: Marketing Moves For 2018
Many ancillary farm buildings were constructed in the past seven years during a stronger farm economy, and their values have softened.
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Recently, I wrote that the first five farmers who sent me a marketing question would get an answer from Farm Journal. The response from readers was quick and slightly overwhelming. Within an hour of making that opportunity available, I had nearly two dozen responses and some excellent questions. In the following days, I will be posting some of the farmers' questions along with some answers from our very own Farm Journal Economist, Chip Flory. I hope the information provided is of service to you. -Rhonda Brooks
Isaiah from Ottertail, Minn., asks: I am a relatively new first-generation farmer, farming since 2013. My marketing question for you is how do I utilize the different marketing tools when I’m limited on the amount of storage that I have for my grain? For example, I will produce about 40,000 bushels of corn for the 2018 crop season but I only have storage for about 20,000 bushels. In the past I have tried to lock-in sales for delivery around harvest time to haul in off the combine to make sure that I have a place for it all. This strategy has cost me some potential upside in addition to the anguish of deciding when to pull the trigger and sell grain some 8-10 months before harvest. Our local basis is (-$.50) for October corn now. By mid-summer it will be (-$.70) to even (-$.90).
Chip Flory, Farm Journal Economist, responds: Being able to store an entire year’s production can be nice, but it can also be an excuse to not take action when mid-summer opportunities are available – it forces you to make a decision on what to do with the bushels that don’t fit in the bin. So don’t view your situation as “restricting” your options. It’s your reality… and keep in mind that your situation was the norm not long ago and plenty of farmers did a good job of marketing in the same situation you’re in. And you’re not alone… storage for half of production is more common than you might think. Basis that far north makes marketing a little tough, doesn’t it? But, if basis for fall delivery is “good” right now (unless your basis improves from mid-summer to harvest), you should be taking action to capture the good basis now. If you anticipate higher futures prices ahead, you should lock in basis now via a basis contract for fall delivery. Then, when you believe futures prices have peaked, lock in the price on those basis contracts to set the net selling price.
I haven’t said anything about your breakeven. If the cash price available for fall delivery is at profitable levels, consider selling at least a portion of the 40K in product via forward contract (locking in both price and basis… the net selling price). If a rally starts later, you can re-own a portion of those sales with a call option. Or if you are confident that prices will move higher but you still want to set the net price on a portion of those bushels to lock in a profit, consider a minimum price contract. (The grain buyer, for a fee, buys a call option on your behalf… any gain is added to your net price. If prices don’t rally, you’ve still got the grain sold at a profitable level. Of course, make sure the minimum price is above breakeven. To calculate the minimum price, subtract the cost of the call option and any elevator fees from the cash price offered via forward contract for fall delivery.)
The bottom line to your question is you might need to bring some flexibility to your marketing strategy by bringing futures and/or options use into your marketing plan. Oh… and there’s no escaping the “anguish” of grain marketing.