There's been lots of ideas passed around lately on how best to navigate the volatility of today's commodity markets, and none of them seem potent enough to calm the storm.
No doubt, the market behavior of late has been exhausting with so much uncertainty of world grain supplies. Just in the HRW wheat market, spot month futures on the KBOT in the last two weeks traded in a nearly 84-cent range, compared to only 52 cents during the same time last year. Markets are also trading outside their historical trends, making hedging even more frustrating.
To help put some measure of control on price volatility, market advisors have recommended using puts and calls in the options market – essentially buying insurance on price – or using buy/sell stops in the futures market.
While there's lots of upside opportunity to be achieved in a volatile market, there's still tremendous downside risk and the agony of having to write big checks to manage marketing positions. You also lose plenty of sleep in the process.
All of this begs the question: How important is price to your bottom line? Is taking the risk of chasing the upside of a market worth the effort?
According to one university analysis, agonizing over the price of grain might be a waste of time. The price received for a bushel of grain, the study says, is a relatively small contributor to farm profitability when compared to other factors involved in farming.
The authors measured price management, cost management technology adoption and yield management for their individual contribution to farm profitability. Of these four, the authors say, cost management and technology adoption had the greatest effect on profit per acre. Yield was found to be moderately significant, while price was found to have the smallest impact of all.
The authors conclude that if producers wish to have continuously high profits, their efforts are best spent in management practices over which they have the most control, namely cost and technology.
It's the lesson ag economists have been preaching for eons: The low-cost producer always wins, and adoption of technology drives down cost. That's where the game of farming is won and lost.
Armed with the knowledge of where the money in farming really lies, what marketing strategy makes the most sense? According to one former ag economist at Kansas State University, the best strategy may be the simplest – shoot for average. Take however many bushels you produced, divide it by 52, and sell that many bushels each week regardless of price. And then, focus on farming.