The last decade of volatile markets has reminded us of the importance of leveraging cash marketing strategies when prices are opportunistic.
With grain prices lower compared to last year, producers need to stay abreast of the various grain marketing tools available to help protect and price their crop.
What happened
After enduring two years of higher grain prices thanks to a bull market in 2021 and 2022, many producers have been a bit apathetic in their grain marketing approach in 2023. Some were confident that the price of corn would remain high throughout the year. Unfortunately, corn prices have fallen by $1.50 over the past year.
Will there be a price rally in the coming weeks due to weather fears in South America? By having a plan in place now and understanding the marketing tools available, you can pull the trigger on cash sales at the right time in 2024.
From a marketing perspective
While the grain price outlook through 2024 is mixed and highly dependent on weather around the world, it's time to prepare your marketing tools so you can take advantage of a price rally should one occur.
In the time when a USDA report or a “tweet” can move the limit of a futures market up or down, you need to be on the right track when it comes time to take advantage of marketing opportunities! Are you looking for a place to start this refreshing process? Look no further.
Ways to secure your cash sales
Although there is more than one way to secure a cash sale, let's keep it simple and focus on two popular methods.
- Forward contracting is a contract between you and a physical buyer of your grain: the elevator, ethanol plant, or processing facility. The futures contract specifies the price, time, quantity and date of delivery. Once you agree to this contract with the buyer, you will know the final price for the grain and will be responsible for delivery to the buyer. The potential downside is that you won't be able to benefit from higher prices if prices increase after the contract is signed.
- Hedge-to-arrive contracts Allow producers to sell grain with a delivery commitment rather than a contractual commitment (based on the difference between cash prices and the Chicago board price). These contracts require a delivery deadline for a specific amount of bushels. The futures price is fixed and known, yet this contract leaves the potential for basis improvement in the coming months. If your elevator offers hedge-to-arrive contracts, make sure you understand the costs (hidden fees) as well as the consequences if delivery cannot be made.
Ways to protect the price “on paper”.
Sometimes you may feel uncomfortable making cash sales, perhaps because you are unsure whether the field will grow bushels. Instead 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 you trust who will teach you the ins and outs of different marketing tools and how to use them properly.
If you want to protect prices and set a price floor for yourself, this is the tool you want to use if you don't have a high risk tolerance Buying a put option. You pay a one-time premium and commission for the put (no margin calls). If you want to set a price floor and leave the upside open for cash price appreciation, buying a put is a great tool.
Another strategy is a fence. A short fence Here you buy a put and sell an out-of-the-money call. The goal is to reduce the cost of the put through the premium from the call sold. The sold call is a margin position if futures prices rise.
Not interested in margin risk? A Bear put spread is the purchase of a put combined with the sale of 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 limits your ability to profit from the position if futures prices fall.
If you have a higher risk tolerance, you should think about it Selling futures. The potential downside is that you will have to meet margin calls. Unlike a hedge-to-arrive contract, where the grain silos meet the margin requirement (behind the scenes on your behalf), the risk shifts to you and you must have cash flow to fund your hedge account.
Prepare yourself
Whatever your strategy, make sure it suits you and your risk tolerance. Make sure you understand and are comfortable with it. Don't bury your head in the sand. Even doing nothing is a risk and perhaps the riskiest marketing decision of all.
If you have any questions, you can reach Naomi at [email protected] or visit TotalFarmMarketing.com for more information.
Disclaimer: The data contained herein is believed to have been obtained from reliable sources, but no guarantee can be given. Persons acting on the basis of this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report. Trading futures and options involves significant risk of loss and may not be suitable for everyone. Therefore, consider carefully whether such trading is suitable for you given your financial situation. Examples of seasonal price movements or extreme market conditions do not mean that such movements or conditions are or are likely to occur frequently. The seasonal aspects of supply and demand are already taken into account in the forward prices. No claim is made that scenario planning, strategy or discipline guarantees success or profit. Any decisions you make to purchase, sell or hold a futures or options position in relation to this research are solely yours and are in no way 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 as an introducing broker with the Commodity Futures Trading Commission (CFTC) and is a member of the National Futures Association. SP Risk Services, LLC is an insurance agency and equal opportunity provider. Stewart-Peterson Inc. is a publisher. A customer can have relationships with all three companies. SP Risk Services LLC and Stewart-Peterson Inc. are 100% owned by Stewart-Peterson Group Inc. Unless otherwise stated, the services mentioned are services of Stewart-Peterson Group Inc. Submitted for bid.
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