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How to Market in a Drought

August 8, 2012
money funnel

Because marketing in such times is difficult the importance of making sound risk management decisions increases.

Provided by iGrow, a service of SDSU Extension

The 2012 drought has been a game-changer in almost every aspect of farm and ranch management, including production, financial, and marketing, says Darrell Mark, Adjunct Professor of Economics at South Dakota State University.

"With the widespread and severe nature of the drought, yield losses, while expected to be large, remain uncertain, thereby creating significant market volatility," Mark said.

Because marketing in such times is difficult, Mark says the importance of making sound risk management decisions increases. Below are some tips Mark encourages agriculture producers to keep in mind when making tough marketing decisions in today's market environment.

Price Trends Can Change Quickly. "The corn and soybean markets have been on a sharp uptrend for more than one month, which tends to reward sellers for waiting for higher prices," he said. "It's important to remember that prices will not increase forever, and when they do peak, they are apt to drop rather quickly."

He explains further. "Even current "sell-offs" in the market which are the result of speculative profit taking can be $0.30-0.40/bu. The current daily price limit in the CME Group corn futures contract is $0.40/bu, which expands to $0.60/bu on a day following a limit close lower (or higher). So, conceivably, the corn market could drop by $1/bu in two trading days. And, the trading days come quicker than calendar days now that the market trades 21 hours per day."

"While there isn't anything in particular that would suggest this will occur, remember that the feeder cattle producer didn't have much forewarning or early evidence of the more than $20/cwt drop in feeder cattle futures prices this last month either," Mark said.

Forward Contract With Care. For many producers, Mark says physical delivery of bushels will be difficult this year if they lose a significant portion of the crop to drought.

"Be certain to read and understand the non-delivery clauses in any cash forward contract. Almost certainly, it will cost money to settle non-performance of forward contracts, often by the amount of futures price changes from the time the forward contract was initiated until the delivery date," he said. "Some grain merchants may also consider rolling the contracts into the 2013 crop year, but again, it may come at a cost."

He adds that revenue protection crop insurance can help offset some of these costs associated with non-delivery of forward contracts. To learn more about revenue protection read last week's Cattle & Corn Comments on iGrow.org.

Mark adds that even ranchers who are forward contracting their calves for fall delivery need to take precautions as they may need to move delivery dates up or decrease delivery weights.

"They might need to consider price slides on both the upper and lower side of the base weight contracted this year," he said.

Use options. While options are rather expensive due to the high volatility in the underlying futures markets, Mark explains that put options can be used effectively to create floor selling prices and calls can create ceiling purchase prices.

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RELATED TOPICS: Corn, Soybeans, Marketing, Analysis, drought

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COMMENTS (2 Comments)

Miguel102 - Woodside, NY
Many crops have been burned, including grains such as corn and wheat grains that are precursors to many foods such as sodas, cereals, baked goods, dairy products, chicken and beef. According to the United States DOA, the cost of food will start increasing in stores across the country later this year. The price hike will be driven by harvest shortages, due to extreme droughts in the Midwest, Midwest droughts will raise the price of food.
1:39 AM Aug 9th
PullMyFinger - Chappell, NE
No thanks. It will be cash sales and cash sales only this year, same as every year. No sense screwing myself and every other producer by playing the buyers games. My farm won't be funding an army of middle men.
4:21 PM Aug 8th



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