Published on Tuesday, January 1, 2019
My name is Peter Schram. I was born and raised on a corn, soybean, and cattle farm in eastern Nebraska. I later attended the University of Nebraska, earning an Agribusiness Degree and an MBA with an emphasis in Agribusiness. I’m currently help out on the farm that my family and I own in Nebraska and I personally own and operate a consulting/brokerage business in which I focus on helping build marketing plans. I have now purchased grain for over 25 years, first at Cargill and now at Beck’s and I am passionate about helping farmers make profitable decisions.
In my role as the Seed Purchasing Manager at Beck’s, I’m often asked, “should I sell here?” I usually respond in question “Are you profitable here? How much have you sold already?” It is very difficult for me to directly answer these questions if I do not know your breakeven and profit goals. Sometimes, if I understand the previous questions from earlier conversations, I will share my short-term opinion of the grain market. I would caution that my opinion and a “should I sell here?” does not guarantee that you will be profitable.
Throughout my career I have helped many farmers market their crops. My belief is that the foundation of grain marketing starts with a plan. Without a strong foundation, a building will eventually deteriorate. With that being said, grain marketing is a difficult subject to teach. When it is taught, most often the speculative side of the business is taught. But as farmers, you don’t want to speculate, you want to be profitable and protect your income. I have observed that many farmers worry about marketing, especially if they feel like they have missed a good opportunity to sell. I have also observed that farmers often miss opportunities because they happen during their busy times of the year. Farmers delay a decision to market, simply because it can be delayed... you are busy and it isn’t the traditional priority. Our dads taught us the importance of timely planting, sidedressing, spraying and harvest- but often, they had a difficult time explaining how they marketed their crop. Furthermore, when an opportunity is missed, it becomes emotional.
I believe that when an opportunity is missed, it’s often because there wasn’t a Grain Marketing Plan in place. The purpose of having a written plan is to remove emotion. It also helps if you share this plan with your partner, banker, or a trusted advisor. Grain marketing truly is more of an art than a science. The markets eventually move with fundamental supply and demand tendencies. Weather, exports, crush rates, feed usage, ethanol grind, currency value changes, trucking strikes, and tariffs all impact the price you can choose to sell at (positively and negatively). Funds or managed money can push the market too high or too low at times. No one can tell you what the grain market is going to do next week, let alone six months from now. Everyone likes to talk about selling at “the high in the market”, but grain marketing is more about having a disciplined approach to making decisions. It’s about the profitability you create from selling your crop. What really matters is the average price that you sell ALL of your crop at.
This is one of my favorite graphics as it perfectly depicts what I mean. Can you relate to it?
This sounds really complicated. Where do I start? How do I create a marketing plan?
The foundation of your marketing plan should be an understanding of your expenses for next year. This can include cash rent, fertilizer, seed, chemicals, lime, equipment, repairs, labor, fuel, etc. If I am working to calculate what my breakeven is at an average or my APH yield, I need to determine what is my profit goal per acre? What price do I need to sell at to hit or exceed my goal OR produce more than my yield goal? What expenses do I need to focus on? What expenses am I missing or having trouble calculating? What new things am I considering trying that will add a new expense? How will these things improve my yields? What level of crop insurance should I buy? How can I use my grain bins to make money? When do I need to sell for cash flow?
I develop this budget and track my progress during the year. It’s important to remember that my actual results versus my budget will be different, as expenses may be higher or lower than what was budgeted and my projected yields may be off. I might even get an unexpected government payment. How do these variables effect profitability? I also track sales and brokerage gains and losses during the year. If I track how I am doing, I have found that it helps remove emotion from the decision-making process I use to market my grain.
While this may sound complicated, the first step is to find a good template. There are several tools available to help build your budget such as FARMserver® and several land grant universities such as Iowa State, Illinois, Purdue and Nebraska who have more in-depth spreadsheets. There are also some very good private providers that have software tools available. All of these resources can help you track the cost of production and understand a breakeven price or a profit per acre, but there are pros and cons to each.
Here are some of the things to consider:
Once I have a plan in writing, I price my crop on rallies over time when I am at or exceeding the price I need to make a profit. It’s important to consider the time of year and the normal seasons the market tends to follow. I typically plan to be aggressively marketed by mid-July and will sell cash up to my comfort zone (50 to75 percent of my anticipated yields or even up to my crop insurance level). I plan to use put options to floor my price on the balance of my production that I am not willing to sell. Puts can be expensive and should be included in your budget. Because puts provide a floor price on the bushels I can’t or don’t want to commit to a cash grain contract, they protect revenue and allow time to make sure I have the yield. Puts can be sold or can be converted to a short futures position or even a cash contract later if they are in the money. More importantly, they are a right to sell, not an obligation. Because every year is different, if you are nervous about committing to selling, put options may be a good tool for you to explore. Most importantly, if it isn’t profitable in your situation, don’t do it.
Additional questions that often arise are “how do I plan to execute my marketing plan?” and “how do you price grain when marketing is more of an art?” I have found that it makes sense to sell during the year when the futures market is most worried about production as this is the time of year with the most unknowns:
This occurs in early spring or summer season. When it feels the worst, I have found that is often the best time to sell. When the market knows or is more certain what production will be (acres x yield), the market will begin to remove risk premium. Focus on how to have discipline to sell good portions of your bushels during those periods of time.
Here are some ideas to consider when executing your plan.
Below is a chart that depicts the seasonally “good” times to sell grain, which has held true in years with a normal crop and a projected carryout that is comfortable. During years that are impacted by weather, the top tends to be later. For example, in 2012 the market top was later in August.
I hope that this has provided enough insight for you to begin thinking about your plan for next year. If you have any questions or need some ideas, please feel free to give me a call or send me an email and I will try to point you in the right direction.
**There is a substantial risk of loss in trading futures and options, therefore you should carefully consider whether trading is appropriate for you in light of your experience, objectives, financial resources and other relevant circumstances.**
Author: Peter Schram
Categories: Ag Education
Tags: Ag Education, marketing your grain, grain marketing