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Grain marketing: Risks and revenue

Work on profit ranges based on cost of production.


November 26, 2007
By Top Crop Manager

In grain marketing, it is truth or consequences, says Ron Frost, grain marketing
advisor with the Pike Management Group in Calgary, Alberta. The truth: Nobody
can identify market highs and lows precisely, so do yourself a favour and shoot
for incremental sales within a price range.

"Setting a target price works for some farmers," says Frost, "but
it often leads to holding grain too long while waiting for that magic number
to appear. A better approach is to identify a profit range and sell within that
range."

Producer Art Peters at Boissevain, Manitoba, does not set target prices. "I
watch for price points, but I'm more interested in identifying swing patterns.
When I see grain markets moving toward the upper end of the range, I sell toward
that top. But I'm realistic. If I hit what turns out to be the middle of the
trading range, I don't lose sleep over the market going a little higher."

Peters also keeps his eye on the basis. If the basis is good and futures are
low, he may decide to sell cash and buy futures. "I plan incremental sales
well ahead of time and tend to follow cyclical market patterns. I sell some
of my canola outright. When the price is good, if possible, I sell call options
about $10 to $15 above the market. Unfortunately, Winnipeg options aren't easy
to trade."

 8b
Grain marketing starts before the crop is in the bin. Photo
By Bruce Barker.

Patience pays
Avoid the 'big dump' Frost says. "When farmers get their backs against
the wall financially, it's easy to get worn down and eventually dump grain into
a market low, especially at harvest."

Big dumps at other times may be a result of loans coming due or capital that
is needed for a new venture. "Or it may just be that the producer is listening
to too much coffee shop talk that says: sell now. Pre-planning incremental sales
will help you stay on track," Frost says.

Producer Ian Mardell, who farms east of Prince Albert, Saskatchewan, says there
is a fine balance between jumping into grain markets at the right time and being
patient enough to wait out lows. He says that on large grain sales with storage
costs factored in, "time sometimes isn't worth the wait."

Mardell makes grain marketing plans well in advance and his first calculation
is what it will take to make cost. "Once I see on paper what it will take
to make my cost of production, I start figuring out my profit percentages. That
gives me the price ranges to watch for. I don't set target prices."

Lay a grain marketing foundation, says Frost. "Think cost of production,
identify market trends and be ready to let at least some of your grain go during
rising trends. When producers hang on waiting for that extra 50 cents a bushel
that never comes, they can miss any number of decent prices on swings that never
quite hit their mark. That's an easy way to lose money and get forced into a
big dump at a market low."

Cost of production
Accuracy in arriving at a cost of production figure is the key to increasing
profits on incremental sales. Mardell adds: "I roll the cost of money as
a marketing cost into my cost of production. At times, futures offer a premium
on today's price, but storage risks and borrowing costs can add up to several
dollars a tonne that erodes any premium."

Frost says grain producers are vulnerable to making marketing decisions based
on short-term market trends. "The name of the marketing game is to set
reasonable expectations to achieve fair value for your grain. With so many factors
affecting global grain markets, there isn't a pin on the wall any more that
says 'fair value'. It's better to get comfortable working within a range of
prices."

A common approach is to develop a marketing plan that tries to improve selling
prices while reducing the risk of selling at low prices. The producer may want
to use options and minimum price contracts to minimize downside price risk.

"Regardless of your approach, there are trade-offs," says Frost.
"Losses from hedges and forward contracts some years will tend to be offset
by gains from their use in others. It depends on your comfort level and the
way risk is managed. Are you a speculator? Or do you consider yourself a risk
manager?"

Speculator or risk manager
Speculators push risk aside in an effort to hit the highest price of the year.
If they think they have got it, they will dump grain into the market and make
huge sales.

"The majority of Canadian producers approach marketing as risk managers,"
says Frost. "They want to make a profit, but they are focussed on the survival
and growth of their business. Marketing is integrated into their business and
they often seek outside marketing advisors. They don't dwell on lost price opportunities
– they plan ahead of time to hit the next good ones."

Regardless of price forecasts, a portion of each year's crop should be marketed.
"Your marketing depends on how comfortable you are working with alternative
pricing mechanisms such as futures and/or options versus the cash market,"
says Frost. "Segregate your expected production into marketable units and
use your cost of production for each different grain to identify your price
range."

Some of your grain marketing decisions can be made to minimize tax liability.
"You may want to shift income into the current year but in other years
defer income. A tax advisor can help you with this," he says.

If you are not losing sleep over lost market opportunities, you are most likely
planning sales well ahead of time and are generally satisfied with your marketing
decisions, regardless of what happens to prices later.