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Nothing has a greater impact on the profit of a farming operation than the grain markets—but nothing is more confusing to a farmer.
Building a strategy for managing the grain markets is like getting base hits in a baseball game. If you swing for the fence, you may hit a home run 1 time out of 10 tries, but you will more often strike out.
Swinging for the fences in the grain markets and striking out can result in bankruptcy. We have all heard of the neighbor who lost the farm in the futures market. Can you make enough on that one swing to make up for the other nine? Probably not.
So your strategy for conquering the grain markets should be going for base hits. The best baseball players are those who get the bat on the ball every single time and get on base. That’s how you score runs. If you get a hit one out of every three at-bats, congratulations, you’re in the hall of fame.
Take a look at these five strategies to conquer the grain markets more consistently.
1) How Much Grain Is in Need of Marketing?
The first thing to determine is quantity. How much grain do you have to protect? How much old crop inventory and new crop production must be established to start building a plan.
With Cash Cow Farmer, farm management software, the inventory is calculated for you automatically as you put in your expected yields or your actual yields. Then you put your forward contracts in the software, and it will say you’ve got x-many bushels of old crop and also x-many unmarketed bushels of new crop. You will always know exactly what you have left to market and what you have marketed already.
2) When Does the Grain Need to be Moved?
After quantity, you want to examine the timing you need to follow.
This has to do with storage space. If you’ve got on-farm storage space, you’ve got to have those bins emptied by harvest and at the best basis. Knowing exactly when the grain bins need to be empty and when the cash needs to be in the bank to pay bills is the next step in the strategy.
3) Which Tools to Use?
Grain marketing can be done using a bunch of different tools available, which is great, but it’s also a curse because it’s so confusing. Each option of managing grain markets does a different thing.
There are three main tools at farmers’ disposal:
- Options
- Futures contracts
- Cash contracts - Almost all farmers do cash contracts. Which is great, unless you don’t get a crop. If you don’t get a crop, then you’ve got contracts to fill and no grain to fill them.
All these are great tools to manage the grain markets, however each tool will perform dramatically different and address risk in a different way. You should use a portion of each of these tools.
A few farmers I know like to sell options, which is a great way to collect dividends. Futures contracts are almost exactly like cash contracts except profit goes up and down as the market does.
Again, there are all kinds of options here, and we actually sit down with our customers and talk about the grain marketing strategy that’s going to work best for them. If this seems overwhelming to you, give us a call.
4) Break-Even Price
Knowing exactly at which price the farm will cover all production and operation costs is crucial in knowing where the farm is on a competitive landscape and how to be profitable. If your break-even costs are way over what you can get out of the futures market and the cash market, you’ve got a totally different problem—a cost problem, which needs to be addressed differently.
Then you need to figure out how aggressively you can grow the farm. Can I take on a bunch of land? Can I buy some new machinery?
5) Profit Targeting
This ties it all together. After costs of production are established, then profit goals can be put into place to start building sales targets and managing growth and new purchases of the operation.
When you’re picking the price to sell your grain, it should include your profit goals. You can’t have ridiculous profit goals like $1,000/acre, but once you know your costs you can start targeting realistic profit goals. And if you’re working with us, we pick prices based on fundamental and technical analysis.
The grain markets don’t care about how much it costs you to produce corn: only supply and demand. You have to figure out if you can afford to buy things. Profit targeting helps make those decisions about the growth of the farm.
Conclusion
“Don't sail go sailing the grain markets without a good skipper.”
We help farmers chart paths through the rough seas of the grain markets by building customized grain marketing plans and managing basis movements. Processes and systems can simplify and even automate the process of grain marketing and farm management. Reach out to us at Cash Cow Farmer to see how this can be applied to your farm.
