It is hard to believe, but in many areas we are over halfway done with harvest. All the hard work and effort you put into producing the best crop possible is drawing to a close. You have solid production numbers and know what you have to market as the year rolls ahead. Now that your hypotheticals have turned into actuals you can put a solid plan in place to turn those bushels into cash. What it takes to put that plan together is what we're going to talk about this week.
The first step in determining how to approach marketing your grain is recognizing what you are as a seller. It may sound weird to hear, but there are several different types of grain sellers. The first is the cash grain seller. A cash grain seller is someone who has in theory run out of time to play the two components of the market (futures and basis). A cash seller is one who has to move those bushels into the local elevator or end user.
As a cash seller your options are somewhat limited, but there are ways to still benefit as long as you recognize and remain aware of certain risks or situations.
As a cash seller one must remember what's most important is the final cash price you receive. A common line I use when presenting to groups or talking to customers is your cash price is like sausage, you don't really need to care what's in it as long as it tastes good.
I've been told selling $9.00 beans with a 25 under basis just feels better than selling $9.00 beans with a 75 under basis. While I understand the psychology of it, it's important to remember that when you bring your grain to town futures gain is never guaranteed. Therefore the urge to give up $9.00 beans at harvest time simply because you want a better basis could net you $8.50 beans in the end. Giving up a cash price at harvest and settling for a lower value months later with storage costs on top of everything else really adds insult to injury when all is said and done.
Of course selling grain in November only to watch it rally through the year hurts as well. Which is why getting to know your way around a call option is never necessarily a bad idea. Talk to someone you trust and who has knowledge of how to approach it, but selling cash at harvest delivery and spending what you would on storage to buy a call can allow you to lock in the low-end cash price while remaining somewhat active in the market as well. If done right this approach can offer a relatively risk-free alternative to commercial storage.
What about those of you storing grain at home? First things first evaluate your position. Put together what sales you have in place, when they ship, how they impact your cash flow and build your plan from there.
Your first priority on additional sales should be based on your cash flow and quality needs. I'm going to state the obvious, but sometimes it needs to be said-do not just put your grain in the bin in October and walk away expecting it to be fine in July. Coring your bins, keeping grain moving and ensuring air flow will guarantee you don't turn already cheap grain into worthless grain. Once you've determined cash flow and quality needs take into consideration when you want the grain out and what works best for your operation from a convenience factor when it comes to moving grain ie don't discredit how busy you'll be in April because you're slow in December.
Once you've established your cash flow and quality needs and built a bit of a schedule around when you want movement and what you need to accomplish sales-wise take a look at your pricing capabilities and your risks.
Of course your biggest, most obvious risk lies in futures. A major futures move to the downside can wipe out any potential basis gains and leave you wondering why you stored the grain. Determine what our pricing outlook looks like and what you're trying to accomplish. Be realistic about the overall feel for the market. For instance this year you know we are looking at bearish ending stocks numbers with the potential of a growing global production outlook. Take into consideration where we are currently trading and what kind of upside potential you are looking at if overall production numbers and demand remain in line with their normal tendencies.
Always plan on a normal production year. You can take possible production issues into consideration, but don't expect every year to produce an outlier. Ask yourself what you could expect if South American production were normal, then ask if your ability to handle risk could withstand above average production-meaning if the market were to lose a chunk of money from where it's currently trading would you be able to handle it financially.
Be realistic about your pricing expectations and write them down. It's easy to forget what kind of value you were hoping to sell for if the market makes a quick move higher. Writing down your goals helps keep you accountable.
Once you take a look at what you want to accomplish from a futures standpoint look at your basis opportunities. Since basis is a function of local supply and demand you have to take into consideration what your local market structure looks like. Are there massive piles of grain at nearly every local facility? Keep in mind that the commercials and other farmers storing grain to home in your area will be looking to sell when basis gets strong too. Don't allow yourself to risk dimes trying to capture pennies.
Once you gauge your futures and basis risk you can determine which approach you take as a seller. If you feel futures are strong but basis could improve look to lock in a futures only or basis later contract. If you feel futures have upside potential but deferred basis values are as strong as they're going to get look at basis contract opportunities, at the same time though if you think that futures and basis fit what you're trying to accomplish don't be afraid to sell the cash and move on.
When determining what type of sale you'd like to make again ask yourself what your ability to withstand downside risk is as well as what you're trying to accomplish when it comes to marketing your grain. Make sure to evaluate your risk versus your reward and if you're unsure of where the market could head you talk to people who may have an idea of overall potential.
It's also important to remember not to assume carry remains in the market. Carry is the one thing that guarantees you will at least get paid to hold the grain out of the pipeline. However you can't capture carry without taking advantage of it when it's offered. For instance if you want to capture the 25 cents of carry in the bean market from November to July you need to sell off of July futures.
In the end you're not going to sell 100% of your stored grain at once. Scale selling is the best way to cover your risk while leaving you open to the upside if gains were to occur. For those of you who are harvest cash sellers don't forget to look at what opportunities are present for next crop year. Take into consideration what we discussed and if the cash prices for a year out presents opportunity getting started on your scale selling is never a bad idea.
In the meantime have a happy and safe harvest and don't hesitate to contact Pro Farmer or myself with any questions, we're here to help!
The views, opinions and positions expressed by the author are theirs alone and do not necessarily reflect the views, opinions or positions of Pro Farmer."