Keeping it Simple

Heather Moffatt, Grain Risk Management Advisor, Agricultural Marketing First

The world of grain marketing carries with it a big suitcase of complexity. This complexity comes in the form of conflicting information, a continually changing landscape and sometimes a lack of marketing education. As well, as the business of farming becomes more complex,
many argue they don’t have time to devote to a grain marketing program. The perception that grain marketing is a very complicated process often stops producers from going forward. Instead, many tend to look for an easy solution. Let someone else do it. Submitting grain to a managed program often appeals to growers. It’s a hands off way to price your crop. These “pools” or programs marketed by a professional group can be a good way to diversify your marketing program, but may not be the best way to price the majority of your crop. Some marketing companies tote all kinds of neat strategies, wrapping them up in pretty paper with a catchy name. Do you know how your bushels are being marketed? At times these programs deliver disappointing returns because participants haven’t taken the time to understand the
parameters of the pricing. Investigate the pros and cons as well as maximum potential of the contract. Ask questions. Is it an average price over a period of time? Is it a minimum price type of program using options?

It’s pertinent business sense to maximize profits and grow your business. Your marketing program need not be a huge time consuming project. It needs some commitment, but less than one might think. Expand your knowledge in small steps. Follow the grain markets daily and familiarize yourself with futures and option pricing. Set up a “test” account and work through strategies on paper first. Start working with
call options and put options. If you sell your crop, pick a call option and follow it through to expiry. Track a put option strategy to protect new crop or corn stored in the bin. This would only take 10 minutes every day or two. Always assess the pros and cons of your strategy before and after.

Once you feel comfortable with call and put options, only then consider expanding to different option strategies. These strategies are often referred to as bull call spreads, collars and strangles. Certain option strategies often involve selling options. Selling options can expose you to
margin requirements. Before entering into option spread strategies make sure you understand the risk/reward. Working through these strategies on paper first, before initiating the actual positions might be a good idea. Seeking the guidance of someone experienced in trading options is important.

Diversification is important to your marketing program. A mix of cash sales coupled with the ability to use options or option strategies will give you an edge. Using managed contracts on a small portion of your production can also add diversity to your marketing. Before entering into
managed contracts ask questions and have an understanding of how they could play out. Understand that you need to take responsibility for your own marketing outcome. Take the time to obtain a basic knowledge of marketing tools. Knowledge will give you the ability to make the
decisions that will best meet the needs of your marketing program.