When Do I Price My Grain?

Heather Moffatt, Grain Risk Management Advisor, Agricultural Marketing First

Some have remarked that we are in the middle of a greed and fear market. Many find this environment confusing and mind boggling. For some, a sense of
complacency has set in. Fundamentals are so friendly, surely this market cannot break? Producers I speak with are excited about the current price opportunities. One of the biggest and possibly impossible challenges is equating fundamentals to price. Given current fundamentals, are $14.00 soybeans a fair
reflection? Couldn’t beans trade at $11.00 and still be in a very bullish environment? Is there a weather risk premium in this price? And let’s not forget who is in the driver seat – money, and lots of it. Many of us have experienced bull markets, but most will admit this one is very different. How do we manage all this uncertainty?

There are two important ways to manage this challenging and volatile environment. Diversify and know how to use all marketing alternatives available. Typically, you have approximately a year and a half to market your crop. Preharvest sales often start in the winter or spring preceding harvest, and go into the summer of the year following harvest. Keeping this in mind, it is prudent to separate your sales over that 18 month time frame. Once you have decided to spread your marketing activity over a year and a half, sell in small increments. To date, this has been an exciting year. Wheat sales, made earlier this season, although at values never seen before, turned disappointing as futures moved higher. Diversifying cash sales, by selling in 10% increments, is important this year. Just as important as this, is knowing how to use options to offset cash decisions, or protect values until you are ready to make the cash sale.

At this point in the year, you will have an estimate of production costs. Cash sales will lock in margins. Futures values are at all time highs. How do I get more aggressive, yet leave myself open to take advantage of any further moves throughout the remainder of my marketing time frame? Put options are downside protection. Pick a strike price, put in an offer and use it as a floor price and lock in your margin. At this time (who knows where we’ll be when this goes to print) you’ve had the opportunity to buy a December $5.00 corn put for $0.35 per bushel. This means that for a $0.35 premium you are protected if December corn drops below $5.00. This option will expire in November. If, as the season progresses, futures values rally higher, take advantage by adding to your cash sales.
If prices deteriorate, you have the $5.00 “paper floor”.

It’s hard to stay focused in periods of such volatility. Some day you’re going to have to “pull the trigger” and sell. Focus on a value (price) that will lock in a specified margin. For example, if I have a 160 bushel corn crop insurance average, and sell 40 bushels per acre of corn at $4.80 ($192.00) cash, use put options on another 40 bushels per acre creating a net $4.65 ($186.00) floor. I’ve got an average gross return per acre of $189.00 on half of my production. I’ve locked in 25% of my production with a cash sale, and have upside price potential on another 25% using the put option strategy. With input costs steadily increasing, it’s important to lock in values that secure profits. It’s never been so important to keep your grain marketing program balanced by diversifying cash sales, and knowing how to use options contracts to minimize risk.