In a perfect world, you’d price grain several times a year, locking in a percentage of production at a profit, as determined by a complete cost of production figure.
But farming isn’t perfect, and only the truly disciplined (and lovers of all things marketing) have annual pricing plans and stick with them.
In reality, bills pop up that you didn’t expect; markets take a dive, but then recover and you’re worried they’ll won’t do so again; or, you’re out of bin space and just need to move some tonnage. Whatever the reason, deciding when to pull the trigger can be stressful for some, add in a year of extreme dryness or other production stress, and inertia can take over. (Story continues below)
Brian Voth, president of IntelliFarm, says that any marketing plan always needs to start with a full (emphasis on full, not leaving anything out) cost of production, cash flow requirements, and storage capabilities.
“Those three things establish the price needed to breakeven and make money, and the timeline on which we need to do that by. When we do our budgets, we want to use five year actual average yields because this gets rids of the bumper crop years and the disaster years and gives us a realistic expectation to budget off of,” he says.
He adds that limiting sales to approximately 25% of anticipated production prior to seeding manages some risk, unless there are prices you can’t ignore. By only pricing some, you maintain flexibility in cropping changes, and generally have another chunk of production priced by early July. “We want to have enough crop priced to take us through the end of the calendar year and ride out seasonal weakness of markets through fall and early winter,” Voth adds.
In a rough year — drought, hail, flooding — Voth says it’s important to look at the area of damage in relation to what we can expect prices to do. If the total area affected is small, the price impact is likely to be negligible, and waiting for a rally can become a dangerous game to play, he says. If the area affected is large in scale (i.e. 2012 U.S. drought), then pulling back on sales makes sense because you’d expect prices to react to that situation. Typically though, our situations are not enough to impact futures, oftentimes it affects basis which also should alter the marketing plan.
“The hard truth, as we’re seeing currently, is that the market does not care if it’s too wet, too dry, too diseased, etc. and at the end of the day, the market is always right. Whether the market goes up or down, farmers need to have a plan on what they’re going to do,” Voth says.