It's worthwhile to learn how the commodity markets work.
Sharing his frustration with the markets at a mid-July seminar, a farmer said, “I sold all my soybeans right off the combine last October. To make up for that mistake I stored all of my corn until July. I feel like everything I do is wrong.”
He wanted to get on the Board and make a bunch of money back. After I explained the risks involved in trading the CBOT he wasn't sure what he wanted to do.
If you feel like you have been zigging when you should have been zagging through the volatile price action in the corn and soybean markets during the last year, I have these suggestions:
First, take time to learn more about commodity markets and develop a marketing strategy that will work for your farm. Review the list of six marketing facts listed at right.
Second, develop a written marketing plan using the marketing checklist. These two steps will help you make better marketing decisions.
Each day, each week and each year the job of the commodity markets is to search for a price where sellers are willing to sell and buyers willing to buy. You may want $3 corn and $9 soybeans, but your hog farmer neighbor wants cheap corn and soybean meal to keep his operation profitable. Last year you both got what you wanted — just at different times.
KEEP THESE SIX MARKETING FACTS IN MIND:
When farmers get sold out of a crop early (like soybeans last year), markets will often go higher to allocate the limited supplies that are still available.
When farmers hold too much of the crop late in the growing season (like corn this year), prices will drop until enough buyers and bargain hunters arrive to purchase the increased supply.
When a lot of old crop is forced into the market late in the marketing year prior to a large new crop, it's almost always at a low price.
Small crops often peak early. The corn and soybean markets topped in March and April this year, before we even entered the critical growing season.
It usually pays to store large crops — holding corn from October of 2003 until April or even May of 2004 made a lot of money — as long as you didn't hold too much too long.
Market time cycles are rarely 12 months long. By observing the Commodity Research Bureau (CRB) index, I've seen corn and soybean markets follow a natural pattern of nine to 11 months low-to-low and about the same top-to-top.
As I told the frustrated farmer, with marketing you get a fresh start each year. Next year take time to work at your marketing, take a positive attitude and approach to the markets and odds are good you will have positive results.
Is the crop you have harvested or the crop you have out in the field at a profitable sales level? Even if the news is all bullish and the forecasts are for record high prices, be willing to make incremental sales when you get into the profit zone and scale up your sales as profits increase. This type of spreadsheet selling nearly always beats the marketing plan of holding for the top.
Storage and basis
Do you have storage to hold your crop or do you pay commercial storage and interest to store your crop after harvest? Even if you have storage, does it pay to hold the cash commodity if the basis is good? Good marketing is also good merchandising. Good merchandising tells you when and how to turn your crops into cash.
Make incremental sales
If the frustrated farmer mentioned at left had made some incremental 10% cash sales from January through June he wouldn't have hit the top, but he would have ended up with a lot more money for his crop than the plan he used.
Use all of the marketing tools available
Using a combination of new-crop contracts, cash sales, hedges, basis contracts and options will give you more alternatives, and the opportunity to make better decisions with less stress.
Alan Kluis is executive vice president of Northstar Commodity Investment Co. If you have marketing questions or want more information, write: Northstar, 1000 Piper Jaffray Plaza, 444 Cedar St., St. Paul, MN 55101; call: 800-345-7692 or e-mail: email@example.com.