Minding Ag's Business
Marcia Zarley Taylor DTN Executive Editor

Thursday 10/04/12

Cash Marketing Habits Die Hard

Huge volatility in the market isn't limited to just futures prices. These actual cash sales since 2011 show corn growers' prices frequently varied by more than $4/bu. for grain sold the same month.

Old marketing habits die hard. Grain farmers typically sell the majority of their crop for cash at harvest--no matter the market signal. Too few are using marketing tools that could take some of the risks out of that proposition. An upcoming DTN workshop, "Marketing Through Mayhem" aims to help.

Enhancing your marketing skills is all the more critical now that price volatility isn't just isolated to futures markets. In fact, a recent study by the Brighton, Ill.-based accounting firm AgriSolutions found actual cash corn sales frequently varied by more than $4/bu. for growers who delivered grain during the same calendar month. In April 2011, the spread between individuals ranged from a high of about $8.40/bu. to $3.75/bu., for example. That's something so big that proximity to an ethanol plant or a feedlot alone can't explain.

For the past 5 years, corn farmers in more than a dozen states have sold 48% of their cash crop with delivery September through January, AgriSolutions found. Some 15% of cash deliveries occurred in January alone--a pattern farmers followed year in and year out, no matter what markets were signaling producers to do.

"The problem with lumping so many sales at harvest is historically that's the seasonal low," said Mark Welch, a Texas A&M AgriLife Extension Service grains marketing economist and one of the course instructors. "The last several years have bucked that trend, but I still contend that won't hold over time, so growers need to take advantage of pricing tools, just to make sure they aren't in the bottom end of the season's price range."

For example, Dec 2013 corn contracts are now running about $6.25, more than $1 above the biofuels-era average of the past 5 years, Welch added. "Growers don't just need to sneeze at that price. They could be doing something not to let that price get away."

In these kinds of situations, Welch encourages growers to tap minimum price contracts offered by elevators. Buying put options is another strategy, as is hedging in futures for more aggressive operators and rolling contracts if prices turn higher.
There's no right tool that works under all marketing scenarios every year, said Darin Newsom, DTN senior analyst and another "Marketing Through Mayhem" instructor. He encourages producers to watch critical signals for the structure of the market, seasonality, volatility and basis--then customize their tools accordingly.

"Everyone markets differently, as a general rule. Some don’t want income, some are willing to hold grain in storage for years at a time. Others sell a portion of their production every month, others forward contract and use futures and options," Newsom said. "The best strategy is whatever works that year. In other words, nobody is always right, or better, than anyone else."
Flexibility is key."Knowing what type of market you are dealing with hopefully leads to better strategy decisions," Newsom said. "If producers use that information to make profitable sales (or purchases), all the better."

DTN University's next day-long "Marketing Through Mayhem" workshop is scheduled Dec. 9, 2012, as a pre-event to the Ag Summit in Chicago. Class size is limited to allow for questions, to play marketing game simulations and to tour of the trading floor of the Chicago Board of Trade. See www.dtnagsummit.com for details or call 888-576-9881.

Read and comment on all DTN Ag Business Benchmarks on the Minding Ag's Business blog.

Follow Marcia Taylor on Twitter@MarciaZTaylor.

Posted at 10:53AM CDT 10/04/12 by Marcia Zarley Taylor
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