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Key Factors for Grain Producers to Navigate Grain Markets

Caleb McConnell
Educational Opportunities: 
Grain, Young, Beginning Farmers
Home > Education & Events > April 2019 > Key Factors for Grain Producers to Navigate Grain Markets

Before marketing any grain, it’s important to know your cost of production. Once you establish a revenue goal, you can adjust your pricing targets throughout the year based on yield. Yield expectations can be fluid throughout the year, but when you understand your costs per acre, making pricing targets becomes pretty simple.

The next step is putting together a written marketing plan. Writing down targets and goals will keep you more accountable when it comes to taking action. Use our grain margin manager tool as a starting point. A marketing plan should consists of three things:
  1. Quantity increments. Typically, a bushel quantity per transaction is 5 to 15 percent of total expected production. These could be equal increments, or scaled up as the price improves or as time passes during the marketing year.
  2. Pricing targets. This is where your cost of production is beneficial. Normally you wouldn’t start marketing any grain until you can obtain a profit. From there, you can place profit goals per acre. Remember, all costs must be accounted for!
  3. Sales deadlines. If prices don’t rise enough for you to meet your target within a specific time period, it’s still beneficial to be proactive in your selling. The pricing targets and deadlines should work together to help you be accountable throughout the year. Deadlines would depend upon your storage availability, but a common goal is to have over 50 percent of your crop priced before harvest. Commodities often times have a very seasonal pricing pattern. Consider these patterns when determining sale deadlines.
Once a plan is in place, there are different tools available to help execute it. Some people may be uncomfortable placing hedges and making margin calls, and that’s understandable. However, your local coop or end user will likely have tools for you to use.

When referring to a cash price, it’s important to understand the two components. Cash price = Futures price + Basis. For example, if May corn futures are trading at $3.85 and your local coop is offering a cash price of $3.50 vs. the May contract, the basis is (-$0.35). Think of basis as the spread between the futures contract and the cash price offered by your buyer.

Forward cash contract. In this case, both futures and basis are set at the same time. You agree to deliver a certain quantity, at a certain time, for a specified price. This option has little flexibility, but is easy to use and can be done at no cost to the farmer.

Basis contract. If local farmer’s selling is limited, the end user would typically narrow (or strengthen) their basis relative to the underlying futures contract. If you feel the basis at a particular time is attractive, but aren’t satisfied with where the futures are trading, you could enter into a basis contract. This means that you would agree to deliver a certain quantity, during a certain time period, at a specified basis relative to the underlying futures contract. Futures price is still open under this agreement until you decide to lock the flat price.

Example: Let’s say you enter into a basis contract at (-$0.15) versus the July contract while it’s trading at $3.70. Cash price here would’ve been $3.55, but as mentioned, you aren’t quite satisfied, and think futures will improve. Let’s assume futures rally $0.20, meaning July futures are trading at $3.90. The end user could easily widen (or weaken) their basis as farmer selling improves due to the futures rally. However, you’ve got your basis locked in at $0.15 under the July contract – so your flat price would become $3.75 if you would decide to fix the futures at $3.90. In these situations, you will likely be a winner and add to your flat price. Now, if you were wrong and the futures price declined, the end user would generally have to strengthen their basis even further to encourage farmer selling. In this area of the country, farmer selling can be affected by weather and road conditions too, which impacts the basis during certain times of the year.

Hedge-to-arrive (HTA). This is the opposite of a basis contract, sometimes called a futures fixed contract. Under a HTA you lock in a futures price, but not the basis. Use HTA when you think the futures are attractive, but either aren’t satisfied with the offered basis or would like some flexibility. With this type of contract, your exposure to the market is only the basis risk. An advantage of a HTA contract is the end user will usually let you “roll” the contract at least once during the same marketing year (October through September).

For example: let’s say you place an HTA on a portion of your crop versus the December contract. In November, you decide to utilize on farm storage and store some of the crop until the following July. At that time, you could “roll” the hedge to July. You would only participate in the spread between the December and July contract. In years with a large carry in the market, you could add 30 to 40 cents to your position. This should cover your on farm storage costs. However, at some point you would still need to fix the basis between December and July. The good thing about HTA is it offers some flexibility to the producer. Another advantage is that the end user is placing the hedge and is making the margin calls for you. Note that an end user typically charges a 3 to 5 cent fee per bushel to initiate the HTA.

Your local grain buyer is likely willing to work with you and explain all the agreements available, including those not covered above.  It’s always important to understand what kind of agreement you’re entering into.
In summary, the two biggest steps in making profitable sales are to understand your costs and to come up with a marketing plan. Once you understand your revenue targets and time constraints, it should be easier to make selling decisions.
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