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Time for a Marketing Makeover?

September 6, 2012
By: Ed Clark, Top Producer Business and Issues Editor
 
 

Extreme price volatility forces shifts in how farmers market

The wild price swings in recent years are driving producers to make big shifts in how they market, particularly in regard to the tools they use. Ed Hegland, by nature a conservative marketer who doesn’t try to hit the peaks, started using options this year. He has also signed up with a marketing service that gives him direction on when to lock in prices.

"My goal is to sell in the top third of the market and live to farm another year," says the Appleton, Minn., producer.

Flexible Marketing. In addition to put and call options to protect both upside and downside price risk, Hegland’s marketing approach includes using forward contracts to sell his corn and soybeans 5% and 10% at a time, sometimes more.

He compares his break-even costs with marketing opportunities and sells when he can lock in a profit. Easy to say, hard to execute, but it helps that he has found a way to largely keep the emotion out of his decisions. Options tools help him accomplish that, he says.

Hegland is not opposed to selling more than one year’s crop in advance. In July, for instance, he used hedge-to-arrive (HTA) contracts to lock in 7% and 10% of his 2012 crop when attractive pricing opportunities presented themselves. "I use HTA because basis here in western Minnesota can be pretty significant," he says.

"Before using options, I just used futures contracts," he adds. "Options are another tool that leaves the upside open. I will still forward contract, however."

Hegland’s motivation for making a marketing change this year is based on the extreme price volatility of the past five years. "I’ve been farming for 18 years. It used to be that 5¢ per bushel was a big market move. Now that’s considered a flat market," he says.

Time for a marketing makeover
Using futures and advice from a marketing consultant, Saybrook, Ill., producer George Jones is able to make competitive marketing moves.

Competitive Edge. Until this year, Saybrook, Ill., producer George Jones remained focused on selling in the cash market.

"I knew that if I was to stay competitive with other farmers, I needed to use more futures," he says. "I’ve rarely used futures. I knew just enough about them to get myself in real trouble."

With direction from a consultant, Jones has put calls in place to capture the upside on the crop he has already sold in the cash market. He’s also installed a put option strategy to cover any downside risk on the cash crop.

For half of the 2011 corn crop he did not sell in summer 2010, Jones used a put option strategy. On the new crop, he bought put options to protect what he hadn’t sold. On 30% of the corn he had sold, he sold calls he had bought to take advantage of the market upside. Such strategies are a sharp departure compared with what he was doing even a year ago, when he was largely a cash seller.

Cheap Insurance. Jones says that options are cheap insurance. "They can protect me. If corn goes up to $10, we have calls in place that will give me pricing opportunities on what I sell in the cash market," he explains. "When it comes to marketing, if you have to think about it, you’re a week late." That’s another benefit of using options.

Options don’t mean Jones doesn’t make cash market sales. His general cash selling strategy is to have 50% of new crop corn sold by the middle of June, with 25% to 30% of that sold to a local elevator. By the end of the following spring, Jones’ strategy calls for selling another 20% to 25% of his new crop corn.

"That leaves only 25% to 30% to be sold between Nov. 1 and Jan. 15, when I need the cash," he says.

Help Along the Way. Hegland doesn’t consider himself a great marketer, which is one reason he decided to hire a consultant who can give him expert advice on a timely basis. "Other aspects of farming I feel I do pretty good, but when it comes to marketing, not so much," he says.

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FEATURED IN: Top Producer - Mid-November 2011

 
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