The purpose of this primer is to assist farmers in learning how to use grain marketing alternatives and to serve as a guide in making everyday grain marketing decisions. The importance of marketing and risk management to farmers cannot be overstated; it is widely held that a 10% increase in price can have a significant impact in improving the bottom line, at times by as much as 200%. It is also held that farming today—particularly with the higher investment required to plant each acre—requires grain sellers to know how to use all of the marketing alternatives available to them and to be able to employ effective marketing strategies.
This publication provides farmers with a basic understanding of the tools necessary to improve their grain marketing skills and profits. The emphasis is on price-risk-reducing marketing alternatives. Some speculative sales strategies that allow farmers to strive for higher prices are addressed in the unit titled "Options on Agricultural Futures." An occasional mention of other speculative alternatives may be necessary in order to complete a specific discussion.
While we have used the word "grain" in this publication, the discussion applies to oilseeds as well. The material contained in this primer has cross applicability to all grains and oilseeds. Specific market conditions may differ, particularly with regards to basis.
Planning sales of grain production is an ongoing process, not a one-time event. The primary reason is that the markets and a farmer's production are 'moving targets.' Both commodity prices and production outcomes are highly dependent upon weather developments and other unpredictable events throughout the production and marketing year. The process of pricing grain requires forward thinking and market planning, combined with flexibility at times, if a producer is to make informed, profitable decisions.
Grain marketers are faced with two types of risk: price and yield. Grain marketing alternatives, used properly, provide one mechanism for dealing with these risks. Price risk is dealt with via various methods: forward pricing in the cash market, hedging futures, buying put options for price risk protection, buying call options to replace grain ownership, etc. Options, in particular, are applicable during the growing season, because it is not necessary to deliver the bushels contracted when using options for price protection. The grain marketer’s plan needs to include taking other steps to assure that all of the bases have been covered, such as the purchase of crop insurance.
Commodity prices, based upon global supply and demand, are constantly changing, thereby requiring flexibility in formulating a plan for marketing a crop. Yields also can be highly variable. The marketing plan presented in this primer accounts for these uncertainties. Grain market planning involves collecting and analyzing information to make informed decisions that are flexible enough to allow necessary adjustments.