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Corn+Soybean Digest

Anxious Over Marketing?

Here's how to limit the anguish Sleepless nights, loss of appetite and wild mood swings are symptoms of several disorders, but they also may be an indication that you need a new approach to your crop marketing.

Recent years have shown that marketing is not as easy as simply selling the crop off the combine or putting it in the bin and waiting for higher prices. Weak prices and new factors, such as the loan deficiency payment (LDP), call for an active marketing plan to realize a profit even from a good crop.

However, for many farmers the thought of creating an active marketing plan isn't pleasant. Time is a factor. So is access to information. Sometimes there's not enough information and other times too much information is the problem. Too many opinions leave you questioning every move. Then there's something called emotion that further complicates matters and clouds decisions.

Overcoming all this may take a new approach to marketing - one that captures profitable prices when they're available, while still leaving open the opportunity to benefit if prices rise.

One lesson learned by many in recent years is to take advantage of profit opportunities when they present themselves. In other words, the trend is not necessarily always your friend, and just because prices have been moving higher doesn't necessarily mean they'll continue on the same track.

"If the market signals that it wants your grain, sometimes it's wise to oblige it," says Moe Russell, president of Russell Consulting Group.

He explains that the basis (the difference between the local cash price and the futures price) often provides this signal to sell. "Watch the basis closely and look to capture it when it narrows (strengthens)." For example, you may want to lock in a basis that's 10/bu under the futures if it typically is 30 at that time of year.

Locking in a profitable price often means foregoing the home run, where you could capture the highest price of the season. Instead, look to hit for average by employing risk management strategies at appropriate times.

Brian Aust, a merchandiser with The Scoular Company in Overland Park, KS, says his philosophy is to not worry about capturing the market high. "We just want to be in the middle part of the upper third."

Often, this type of marketing strategy involves selling the crop a little at a time. It begins before harvest through the use of some sort of forward sale. To maintain flexibility, futures, options or minimum price contracts are often used. Then, when harvest does roll around, it's time to reassess the market, capture the highest possible LDP (if there is one) and look to remain in the market to benefit from any postharvest rally.

In many cases, a marketing strategy of this type may stretch 12-18 months in length.

However, following this advice means you often won't achieve the top price of the season. That's simply because you have reduced risk by locking in prices at a predetermined level using hedging strategies. To achieve the top price, you would have to be exposed to the full risk of the market and just hope prices move in your direction.

Storage can be one of these methods if it is not used appropriately. When you have crop in the bin, you're long that crop. This means you benefit dollar for dollar if prices rise, but you also leave yourself open to unlimited downside risk and the risk of spoilage, or at least shrinkage, while the crop is in the bin.

Storage does take away risk - the risk of being forced to sell at harvest. It also can be a great tool when used in conjunction with some hedging strategy.

You've certainly heard it before. "Know your tolerance for risk before you develop a marketing strategy." Yet whether you're willing to take risk or not doesn't matter if you can't make a profit from your crop.

So the first step in planning a marketing strategy is determining at what price you're making a profit. One method of doing this is by calculating gross dollars per acre.

Russell advises his clients to add up all expenses, including operating costs, principal and interest on debt, living expenses, depreciation and some sort of profit expectation (he uses $50 an acre when the customer is unsure).

Next, he divides this total by the number of acres, which calculates the gross dollars per acre needed to reach a profit goal.

He uses this method for two reasons. The first is because this number doesn't vary as widely as other methods, like multiplying an average yield by an average price. "The statistical variation is much smaller," he says.

The second is that this calculation takes emotion out of the equation because you don't get fixated on selling at a certain amount of dollars per bushel. Instead, you look at all revenue sources, including government payments, and focus on achieving a set amount of dollars per acre.

In the end, it's easier to take action without second-guessing when the market reaches a level that's equal to or above the dollars-per-acre figure you established. So the next time a spring weather scare causes futures to run up, or a demand situation in your area causes the basis to strengthen, you won't hesitate to take action.

Brad Aust, a farmer near Bucyrus, KS, uses a formula similar to Russell's, and says it does help him pull the trigger, at least on a certain percentage of production. "It gives me more confidence in making marketing decisions ahead of time," he says.

That's the primary point of this exercise, says Russell. "Decisions are key, not advice. Advice is free and can be found anywhere," he points out. "How and when to take action is what's important."

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