After a year of some of the most volatile markets in history, growers need a careful marketing strategy to turn a profit in 2022-23.
“The last two years have made for smug marketing,” said Jim Beusekom, president of Market Place Commodities in Lethbridge, Alta. “Holding onto commodities and waiting for the price to go up worked (then) but unless the market is in an aggressive uptrend I would expect that to be over.”
Paterson Grain’s Brian Wittal says farmers need to diversify and spread their risk by using different tools rather than just one strategy. He says big daily market moves mean farmers have to make decisions faster or risk missing opportunities.
Beusekom emphasizes profit-taking, if there is any. “Don’t just compare prices to the last six to 12 months. Indeed, why bother? Instead, sell the profitability base. Think of selling crops the way a grain company would: if it’s profitable, sell it.”
Lock up how much?
But what is profitable? Growers need to figure that out, starting with estimating their production costs for each crop, says Neil Blue, crop market analyst at Alberta Agriculture, Forestry and Rural Economic Development. He recommends using crop budgeting software and related online resources.
Blue also asks growers to estimate yields for each crop to determine break-even prices per ton or bushel. “Compare estimated break-even to available prices from spot and futures/options markets considering historical prices and base levels.”
He says you should consider cash flow needs and set target prices based on a conservative portion of your expected harvest. As a rule of thumb, the pre-harvest price should not be more than 50 percent when quantity and quality are better known.
Neil Townsend, chief market analyst at FarmLink Marketing Solutions, says despite high prices earlier this season, many farmers were unwilling to settle down. That was partly due to ongoing concerns over last year’s drought, as well as spring weather issues such as drought in Alberta and parts of Saskatchewan and excess moisture in Manitoba.
And since crops like durum wheat, lentils and peas can’t be hedged in the futures markets, growers have been uncomfortable selling too far forward, Townsend says.
Instead of selling crops in typical 20 to 30 percent increments, he recommends farmers consider 5 to 15 percent just because of market uncertainty and volatility.
“If you see prices going up, sell another piece because the price isn’t going to stay high. If you can make money at a certain price, consider selling it to free up space.”
On its website, Alberta Agriculture says futures and basis for hedgeable crops are traditionally weak just after harvest, which is a signal to stockpile grain and wait for price improvements. So if you can afford to be patient and have the space in the container, you can store more harvest than usual to buy time.
sell signals
According to Blue, a good time to price cash grain or sign a delayed delivery contract is when both futures and basis are strong.
Weak futures with a strong basis signals good local demand, which is the time to secure that basis with a basis contract while leaving the futures leg open for a rally, Blue says.
Farmers can also plan their cash grain sales for seasonal highs.
Errol Anderson, president of ProMarket Communications, says buyers tend to enter the market as early as late September and continue buying into December.
“Clearly, well into November the selling pressure is classically over after harvest and then buyers start covering cash sales.”
He explains that while many growers are already postponing deliveries into the New Year – often for tax reasons – buyers will sweeten their offers with spot base sales to ensure they have their grain purchased and delivered before Christmas and the New Year.
Base levels typically weaken thereafter as buyers have covered their sales, and farmers may have to wait until buyers’ inventories run low in the spring for another period of strong bases, Anderson says.
Waiting too long
Paterson Grain’s Wittal urges farmers to keep an eye on markets for an indication of outlets, rather than sitting on stocks through the winter. Every month in the trash comes with potential missed opportunities and reduced quality.
Wittal watched farmers deliver the grain of the year 2021 this past July, and some were tough, heated or had insects on them.
“It’s not always the case that grain, once in the bin, is as good as gold,” he says. “If you don’t think you can recoup or cover those costs by waiting for markets to rise, you’d better get rid of them sooner rather than later.”
capture carry
Ideally, farmers who store their grain while waiting for sell signals can get paid to do so. One way to find out if this is possible is to observe the viability of the market. When there is a positive holding fee, deferred futures contracts trade at a premium to neighboring contracts. A positive carry asks you to make a forward sale and you get paid to store the grain for a few months.
A negative holding fee – or an inverted market – is the opposite: nearby futures contracts are trading at a premium to deferred ones. This occurs when supplies are low and is a signal to farmers that they can receive a premium for immediate deliveries.
Hedging your bets with options
Puts and calls can allow you to take advantage of price changes without investing physical grain
Combining cash strategies with futures or options is a great way to diversify risk, but some experts prefer options, especially in volatile markets when expensive margin calls may be required to maintain your position.
“The key is to give yourself flexibility,” said Errol Anderson, president of ProMarket Communications. “Cash contracting is important, but at the same time it is also very beneficial to use some risk management in your trading account. The markets will be volatile.”
Unfortunately, for many crops that used to have futures markets, such as feed wheat, barley, oats and flax, futures markets no longer exist, reducing price alternatives, says Alberta Agriculture’s Neil Blue.
“Some offset to this is provided by the increasing number of delivery points, resulting in improved buying competition in most areas of the prairie.” He says farmers can still use US futures for wheat, oats, corn, soybeans and soybean products . A rally in corn, for example, is a hedging opportunity for prairie feed grain growers.
puts and calls
A good time to buy a put option is when the futures are strong but the basis is weak. It offers producers protection against futures price slides and allows them to command higher prices for their physical stocks should futures rise.
FarmLink’s Neil Townsend says the best time to hedge with put options would have been if prices had risen in the spring. Another way to buy a put is when you are unsure of the quality but want to set a price without tying up physical grain.
According to Anderson, the most useful risk management tool this year has been the put option. “That was the star.” He cites a particularly successful use of puts during a strong rally in soybean meal futures in Chicago. When the market crashed, these options doubled in value. “There are opportunities when you see a market take off like a rocket.”
“I’m just a big believer in using a combination of cash grain contracts and trading accounts because both are beneficial overall,” Anderson says. “When you feel like you don’t want to allocate more tonnage to a grain buyer, your commodity accounts come into play as you don’t commit to delivery.”
When futures are weak but the basis is strong, farmers should buy call options to take advantage of potential futures rallies, says Alberta Agriculture. Producers could also conclude a favorable basic contract.
If growers don’t have a price this fall, they can be caught selling in slack markets. In that case, they can buy call options to reopen their price cap, Anderson says.
“There is room for a grower who hasn’t set a price to sell on the spot market for cash flow or storage space and then recaps it for a mid-winter market rally.”
A trading account gives farmers flexibility outside of a spot market, Anderson says. “You can either protect your bottom or reopen your top. Don’t just focus on your cash marketing.”
Anderson also encourages growers to make marketing plans up to a year in advance.
“It’s not too early to start looking at rapeseed in November 2023.”
Some growers shorted this market months ago to keep prices out there, Anderson says.
Look at your farm marketing plan for at least six months, he says. He favors the strategies of farmers who come into the fall fairly well covered, deliver and take their profits, and then focus on next year.
“I don’t like chasing a market,” says Anderson. “I know growers who get caught selling into depressed markets and want to reopen their cap so they can get some of their money back, but I’d rather think forward than backward.”
Market Place Commodities’ Jim Beusekom also calls for longer-term planning.
“Markets are forward looking, so the futures market trades up to two years ahead. As a producer or even an end user, the struggle for them is to get out of the current market mindset and the best way to do that is to look at the futures markets and see what is being traded. It helps provide direction.”
Comments are closed.