Your 2007 Grain Marketing Check List

Heather Moffatt, Grain Risk Management Advisor, Agricultural Marketing First

Grain marketing tops most producers’ lists as the biggest challenge they face. Remember when you learned to ride your first two-wheeled bike? Your balance and co-ordination was off and often resulted in a crash with scraped elbows. Since this was not a pleasant experience,
you concentrated, worked on balance, and mastered it, seldom to crash again. If marketing was only that simple. Time and time again, I confront the same issues when farmers first venture into a risk-managed program. Patience and time are two issues rarely discussed. A risk-managed program is rewarding over the long run. Too often producers are looking for “instant gratification”. “I bought a call once and it expired worthless.” A risk managed program entails looking at all grain price possibilities, assessing risk and taking a position to protect against risk. Realize that sometimes you will protect price and you didn’t need to. Other times you are really happy you did. Buying corn puts during spring or summer rallies have rewarded producers. Over the last 16 harvests, going back to 1990, using puts would have protected harvest values 13 out of 16 seasons. Even this year, puts were rolled down, and the ability to take equity out of them was possible. Even if the puts expired worthless, the rallying corn price has more than made up for the premium spent on the puts. It’s the beginning of a new year and a
new set of challenges. It’s also time to attend meetings, get into the office and plan for spring. This may also involve fine tuning or changing your marketing program. I’ve included a list of “hurdles” I see farmers facing. These keep resurfacing. Cut this list out and post it by your computer to stay on track as you work to improve your marketing program.

Here are some key rules for being a successful grain marketer:

1. Educate yourself on how all marketing tools work. Expect this to be a time consuming process. It won’t happen overnight.
2. Open a trading account to hedge and manage risk, not speculate.
3. You will not make money on your hedge account and your cash grain. Think about it. If you hold a short futures position or a put option and equity in your trade account is going down, this means the market is going up. Your cash grain is worth more.
4. It’s fine to look into the “crystal ball” but if you remember from the old movies, it’s often cloudy. If you assess the corn market, and think it has the potential to rally, you may want to buy puts to protect current values and wait to assess future developments. If you’re selling grain at historically low values for cash flow, buy calls to maintain ownership.
5. Short futures are a good way to hedge, but your lender must understand hedging and be willing to cover margin calls in order for you to manage the position.
6. Always calculate the risk/reward to every strategy you initiate (on paper).
7. When you decide to work with an advisor/broker, ask questions. Make sure both of you share similar goals and objectives and marketing philosophies. Your broker should understand your business.
8. Don’t let outside influences sway your decisions. Do what you know is right. Offset your decision with an opposing option position.

The 2007 crop year is starting out an exciting but challenging one. There has seldom been such a degree of volatility and unpredictability surrounding the grain markets. A solid, well-planned grain marketing program will reward you in the long term.