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GRAIN MARKETING: Having a marketing plan helps get everyone on the same page and reduces pressure on the person making the decision to sell.

Marketing plan helps with decision-making

Timely Tips: Farming partners need to agree ahead of time before opportunity knocks.

Each month in Wallaces Farmer magazine, the Timely Tips panel answers questions sent by readers. Members of the Timely Tips panel are Alejandro Plastina and Wendong Zhang, Extension economists, Iowa State University; Leslie Miller, Iowa State Savings Bank, Knoxville; and Rob Stout, Master Farmer, Washington, Iowa.

I farm with my two brothers. We make all major decisions together. With grain marketing, the three of us often have different opinions about when to sell and how much to sell. We usually end up not selling enough early enough to capture marketing opportunities. How can we deal with this?

Stout: The three of you should attend marketing meetings together to learn about the best time historically to price crops. Farm Bureau and ISU, as well as others, have marketing meetings which would benefit your operation. Then decide as a group on a marketing plan, and how many bushels to sell at what price or timeframe, based on your projected cost of production. Then follow through when the price hits your target, instead of thinking it will go higher.

Unless something has fundamentally changed to push prices much higher, stick to your marketing plan. In recent years, it has paid to have at least 50% of your crops priced before harvest.

Plastina: Since you are already making major decisions together, it makes sense to add grain marketing to the list of joint decisions. After all, grain marketing is one major activity affecting the bottom line of your business. There are a number of tools that can be used to create a marketing plan (such as futures, options, hedge-to-arrive contracts and preharvest marketing with revenue protection), but I will focus on cash sales.

The first step toward creating a successful marketing plan is calculating your expected cost of production per bushel. Then, make a list of all your monthly cash needs, and develop a monthly cash flow budget.

Identify the gaps in your budget and put in writing the dates when you would need to sell part of your grain to cover those gaps if no other sales are made. Those are the trigger dates. Agree on the lowest price points at which you are willing to sell part of your crop to cover costs in some cases and lock in some profits in other cases. Those are your trigger prices.

Finally, put in writing and have each sibling initialize or sign the plan stating:

  • trigger prices
  • lowest and highest quantities to be sold at each trigger price
  • trigger dates
  • minimum quantities to be sold at whatever prices the market offers on those trigger dates

If market prices do not reach trigger prices before the trigger dates, then sell the agreed minimum quantity at each trigger date. As soon as market prices reach a trigger price, sell a portion of your crop within the range agreed in Step 2.

No marketing plan can secure profits, but a structured marketing plan with trigger dates and prices will spread the price risk over several months, reduce the guessing and associated emotions, and ideally help you capture the marketing year average price. A detailed discussion of crop marketing fundamentals is available in a series of videos on the Crop Storage and Markets page of the Ag Decision Maker website.

Miller: Marketing is challenging for most farms, but a written marketing plan developed and agreed upon before the crop is planted might help. You need to determine your breakeven price and decide if you want to use forward contracts or a variety of price protection mechanisms. If you are planning to use futures or options, it’s important to find a marketing professional who understands your operation.

If you are unsure of what types of marketing tools you should use, you might follow a basic marketing strategy given to me by Art Barnaby, Kansas State University economist. He says, “Forward-contract a third of your crop because you are certain to produce at least a third of a crop and forward contracting is easy to do.” He also recommends using options on a third of your crop because weather adversity can often reduce yields by 30% and options do not commit you to physical delivery of your crop. The final third he felt was covered under your crop insurance coverage and did not necessarily need to be forward priced. 

My nephew will graduate from high school this spring. He has helped me farm during summers and on some weekends. His parents want him to go to college, but he wants to farm with me. I don’t have sons or sons-in-law, and I plan to retire in five years. How can my wife and I work him in? Or should we step aside until he, my sister and her husband work things out?

Stout: College is good preparation for entering farming as a career.  Technology is changing so fast that your nephew could learn enough to add more value to your farm. You could still ease him into your operation while in college by having him help on occasional weekends and summers. That way he would be ready to join your operation in four years, so you can begin transitioning over to him. It would be good not to get in the way of his parents, so that he can get his college degree, which they desire, and in the end, he can still farm with you, which you both desire.

Zhang: This is definitely an issue requiring more family discussions not just between you and your nephew but include his parents as well. Higher education could be beneficial for your nephew and I would have candid conversations with him on what his aspirations in life and as a farmer are and plan the college discussions accordingly. If your farm is mainly crops, training on farm management, land valuation, agronomy, and marketing could help him run the farm more like a business. If your farm also has livestock and that is his passion, getting education in animal science could help realize growth and more profits.

The ISU Ag Decision Maker website offers info on many of these topics. Depending on your farm size, another consideration is whether he will make enough income solely from the farm, if not, college could also offer job opportunities such as farm manager, ag sales, appraiser, etc. while he is farming. If he is really eager to start farming, he could also explore the possibility of enrolling in a local community college with a schedule that could fit both college education and farming.

Miller: The most successful beginning farmers I have financed usually work their way into farming with an off-farm job and farming on the side. It allows them to cover their living expenses — including expensive health insurance — while saving the farm income for re-investment in the farm operation. It may take longer to build up the operation, but they also have lower risk of failure.

Since most employers prefer to hire someone with education beyond high school (two-year or four-year degree), it would be good to encourage your nephew to further his education. If he attends a school nearby, he can probably still help you on weekends during planting and harvest. If you like working with your nephew, you can start working him in by allowing him to rent a few acres from you.

 

 

 

 

 

 

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