FORMULATING AND MANAGING YOUR 2005 MARKETING PLAN
by Heather Moffat Grain Risk Management Advisor Agricultural Marketing First

February can be a very quiet time in the grain markets. We intently watch the development of the Argentine and Brazilian crop, and study weekly United States Department of Agriculture (USDA) sales and inspections reports to track government targets. Other than that, we patiently await spring and the March 31 planting intentions report to start the new season off.

Marketing your 2004 crop will be remembered as extremely frustrating or satisfying. If you fall into the "frustrated" category, we need to explore why. As farmers you work in a very risk related field. Some of those risks are manageable and some are not. My pick for the top two risks would be weather and commodity market volatility. Weather is uncontrollable and obviously impacts production. We can manage production risk with crop insurance. Your next biggest risk is the price received for your commodities. But this risk is manageable, to a certain extent.

New era agriculture has posed new risk management challenges. A few of these would include prudent manure management, controlling new plant pests and disease and the ability to trace all farm products, but we have learned to assess these challenges and work with them.

Risk assessment is, and should be, addressed in every business from the corporate world through to the farm gate. The two businesses are no different in this aspect. Risk assessment in a large-scale corporation would involve close scrutiny of varying degrees of risk, statistical evaluation, and mathematical diagnosis. Insurance companies for instance, hire actuaries to assess risk statistically. How can we apply such methodology to our risk situation? Probability charts are very useful at assessing grain-pricing risk and are an excellent tool in helping target realistic pricing objectives. In the following wheat chart, a compellation of 23 years of data, illustrates that 80% of the time cash (in U.S. dollars) harvest prices are below $3.30, and 50% of the time they are below $2.85. Work with the odds. What is your 2005 harvest target? To effectively manage and make changes to your marketing program, you first need to make a conscious decision to not be exposed to risk. This may sound like a strange statement, but can be otherwise coined as "taking the bull by the horns." Make a "pact" with yourself to do something about it. Next assess the likelihood or severity of loss and create a loss prevention agenda. We reviewed statistical evaluation, now let's look at market fundamentals. In the February USDA supply and demand report estimated corn ending stocks at 2.010 billion bushels, or a stocks-to-use. of 18.6%, the biggest carryout since 1993. Not as much fun as last year at this time when we were dealing with a carryout number of 901 million bushels. Even though usage is currently pegged at 10.770 billion bushels, a yield of 143 bushels on 83 million acres (75.5 harvested), would keep carryout similar to today's levels. Realistically, December corn trading up to and through $2.40 would be a good hedge target. What are your goals given current fundamentals? Do you have a plan for lower or higher prices?

Create a risk transfer plan that includes a hedging strategy, insurance, and diversification. Hedging could be defined as an action taken to reduce exposure to loss, and retain the possibility of a gain. As farmers you should fall into the category of "cash flow hedger." This person is defined as one who is concerned about profit margins and cannot risk price deterioration. You have to be willing to miss out on market lows (that's easy) and highs. When you consider the implications of both, you should be able to work within these parameters. This objective is effectively arrived at by the use of put options - insurance. Puts are bought to "lock in" a futures price by paying the insurance premium. Take for instance, a proposed target of $3.30 July CBOT wheat futures. Today, July 2005 futures are trading at $3.05, so the "premium" for the proposed target of $3.30 is quite high. To manage your goal, place an open order to buy the July 2005 $3.30 put at $.15. Wheat futures would have to rally sometime before harvest, but your objective/goal would be met without you having to monitor the market consistently. What the put option will do is establish price protection - price insurance - on paper - leaving your sales possibilities completely open. Should prices rally higher you have better pricing opportunities. If July futures prices fall below the $3.30 insurance price, you have the right to collect the difference -simple. Option hedging is not complicated.

In summary, grain marketing ranks in the top two farm related risks. If you are unhappy with marketing results this year, you need to make changes. Take a look at price probability charts to start assessing realistic price targets. Study current domestic and world supply and demand numbers to help you assess realistic price goals. Diversify your marketing plan. Part of the diversification process might be to explore an options hedge account. These suggestions will put you on the road to success. Start putting your plan in place; spring is just around the corner. Are you ready?