Managing Grain Risk....Are You Prepared?

by Heather Moffatt, Grain Risk Management Advisor, Agricultural Marketing First

I’ve been asked by many farmers over the years, “If grain prices are good, is there a need for a hedge program?” The answer to that question is definitely “yes”. If you try to define risk management, you will realize why. Dealing with risk associated with your marketing program isn’t a one-time deal. Grain is produced globally. This environment is constantly changing. Impacts such as weather, government
intervention (trade policy), consumer preference, disease and currency fluctuations are only a few. Risk associated with your grain-marketing program will always be present. Managing grain risk should be at the top of your list.

STEP ONE:
Take responsibility for your actions. There are three kinds of people: Those who make things happen, those who watch things happen and those who say, “What just happened?” No one can accurately predict market direction – period. Realize you are not going to get it right every time.

STEP TWO:
Understand the power of a positive attitude. Attitude shapes success and is highly contagious.

STEP THREE:
Educate yourself. Find someone credible who can guide you through the process. This person must be able to maintain an unbiased opinion and be able to critically assess current and upcoming scenarios. Stop procrastinating! Crash through your “comfort zone” and move forward.
Realize your business success depends on it.

STEP FOUR:
Have a plan.

Harvest is again upon us. The harvest season is an important time of year for your marketing program. You fill previously priced contracts
and offset put options or short positions you’ve implemented throughout the year to protect price. As harvest concludes you calculate final bushels and devise your marketing plan. This is where I most often see things go wrong. The word “plan” seems to go amiss. Strange statements like “I think”, “grain should”, “I’m doing the opposite of last year”, “it can’t go any lower”, and “Bob says” seem to rule the decision making process. What you need to address is storage expenses versus the cost of reowning sold bushels, and market carry on farm stored grain. All this needs to be calculated in detail. One of my favorite websites, farmdoc at the University of Illinois, has an excellent
section on their website called FAST Tools (Farm Analysis Solution Tools). Under Grain and Marketing Management http://www.farmdoc.uiuc.edu/pubs/FASTtool.asp?category=grain you will find an excel spreadsheet which will enable you to calculate
breakeven storage costs. Simply storing grain with no plan can often lead to frustration and disappointment. Do you find yourself engrossed in a frustrating marketing cycle? Do something about it.

These are interesting times in agriculture. Use of wheat and corn for ethanol and soybeans for biodiesel have the demand side of the balance sheet looking brighter. Remember the world is a big place and is constantly in flux. Futures values appear to hold promise, but Ontario farmers still have to manage that strong Canadian dollar. The trade is dealing with an unprecedented volume of grain in Ontario, assuming corn and soybean yields come in as anticipated. Keep in very close contact with your merchandiser or receiving elevator to assess their 2006/07 sell/store policies. It appears a lot of new on-farm storage has gone up this summer. Make sure you are using it wisely. Having a hedge program in place will enable you to manage price volatility.