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November 29, 2023
The past decade of volatile markets has led to the reminder of importance of taking advantage of cash marketing strategies when prices are opportunistic. The reality of lower grain prices compared to one year ago at this same time frame has reminded many producers of the importance of being updated on the various grain marketing tools available for helping to protect and price your crop.
Coming off two years of higher priced grain thanks to a bull market in 2021 and 2022, many producers were left apathetic in their grain marketing during 2023.
Surely the price of corn would stay high was the notion. Unfortunately, that was not the reality as corn prices dropped $1.50 over the past year.
Looking toward 2024, there will likely be a price rally in the coming weeks due to South American weather scares or potentially short covering by the funds into year end.
Having a plan ready now and understating marketing tools available to you will allow you to pull the trigger on cash sales at appropriate times in 2024.
While the price outlook for grains heading into 2024 is mixed, and heavily dependent on weather around the world, it is time to get ready with your marketing tools so you can take advantage of a price rally, should one occur.
In the day and age where one USDA report or one “tweet” can move a futures market limit up or limit down, you have to be on your game when it comes time for taking advantage of marketing opportunities! Looking for a place to start this refreshment process? Look no further.
While there is more than one way to lock in a cash sale, let’s keep it simple and focus on the two most popular methods. Let’s first look at forward contracting.
This is a contract between you and a physical buyer of your grain; the elevator, ethanol plant or processing plant. The forward contract specifies price, time, quantity and date of delivery. Once you agree to this contract with the buyer, you the producer know exactly where, when, the quantity, and the final price received of the grain you are then responsible for delivering to the buyer. The potential negative is the inability to benefit from higher prices, should prices increase after you have entered into the agreement.
Another way to sell grain with a commitment to deliver and not a lock in basis (basis is the difference between the cash prices and the price in Chicago on the Board) is called hedge-to-arrive.
Hedge-to-arrive contracts require a delivery period on a specified quantity of bushels. The futures price is locked in and known, yet this contract leaves the potential for basis improvement in the months ahead. If your elevator offers hedge-to-arrive contracts, make sure you understand the cost (hidden fees) as well as ramifications if delivery cannot be made.
Sometimes, you may not be comfortable making cash sales for various reasons. Usually it is in part due to being unsure of bushels growing in the field. In lieu of cash grain contracts, you can sell futures or use options with a commodity brokerage firm. To do this, you need to open an account, and find a broker that you trust to teach you the ins and outs of different marketing tools, and how to properly use them.
When looking at protecting prices and giving yourself a price floor, if you do not have a big risk tolerance, then the tool you want to use is “buying a put option.”
You pay a one-time premium and commission for the put (no margin calls). If you are wanting to establish a price floor and leave the topside open for cash price appreciation, then buying a put is a great tool to use.
Another strategy is a fence. A fence is a strategy that “fences in a range of prices”. A short fence is where you buy a put and sell an out-of-the-money call. The objective is to reduce the cost of the put with premium collected from the sold call. The sold call is a marginable position, so you will need quick access to cash in order to meet potential margin calls if futures prices move higher, (but keep in mind, if the futures price is rallying, likely your cash price is moving higher as well, and you benefit as the cash price on your grain increases).
Lastly, a bear put spread is the purchase of a put combined with selling an out-of-the-money put in the same contract month. While selling a put can help reduce the cost of the long put, it does cap your ability to gain on the position if the futures prices drop. As a producer, you should question if you really want to cap your long put option value if prices are weak. Yet, if you believe the market can go down only to a specific level, then selling an out-of-the-money put option may be advisable.
If you have a bigger risk tolerance, then you might want to consider selling futures. The potential negative is that you will be required to meet margin calls, which can grow dramatically if the futures price rallies. Unlike a hedge-to-arrive contract where the grain elevators meet the margin requirement (behind the scenes on your behalf), the risk shifts to you, and you will need to have cash flow readily available to finance your account.
Whatever your strategy, make sure it works for you, that you understand it and you’re comfortable with it. Preparation is key to marketing, and by pre-planning and being prepared, you’ll be many steps ahead of most.
As a producer, you must be aware of the tools you can use to shift risk. Don’t bury your head in the sand. Doing nothing is also a risk, and perhaps is the riskiest marketing decision of all.
Disclaimer: The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Individuals acting on this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report. Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Examples of seasonal price moves or extreme market conditions are not meant to imply that such moves or conditions are common occurrences or likely to occur. Futures prices have already factored in the seasonal aspects of supply and demand. No representation is being made that scenario planning, strategy or discipline will guarantee success or profits. Any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to Total Farm Marketing. Total Farm Marketing and TFM refer to Stewart-Peterson Group Inc., Stewart-Peterson Inc., and SP Risk Services LLC. Stewart-Peterson Group Inc. is registered with the Commodity Futures Trading Commission (CFTC) as an introducing broker and is a member of National Futures Association. SP Risk Services, LLC is an insurance agency and an equal opportunity provider. Stewart-Peterson Inc. is a publishing company. A customer may have relationships with all three companies. SP Risk Services LLC and Stewart-Peterson Inc. are wholly owned by Stewart-Peterson Group Inc. unless otherwise noted, services referenced are services of Stewart-Peterson Group Inc. Presented for solicitation.
senior market adviser, Total Farm Marketing by Stewart Peterson
Naomi specializes at helping farmers understand how to manage cash marketing needs and understand the importance of managing basis, delivery point considerations, cash flow needs and storage capacity. She earned her Bachelor of Arts in Political Science with a minor in Agriculture Business at the University of Wisconsin in Platteville. She has a Master of Science in Adult Education with an emphasis in Ag Economics from the UW-Platteville and a Master Certificate in Global Education, from the UW-Oshkosh.
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