6 Steps to a Plan

August 12, 2009 07:00 PM

Linda Smith, Top Producer Executive Editor

Map Your Marketing Year

How much money was left on the table when you sold your 2008 crop? Corn futures prices fell from $8 to $3 between June and November 2008. A proactive marketer may have banked twice the income a passive neighbor did.

To thrive in tumultuous times, you need to have a big pricing arsenal. That's why Top Producer is launching the Risk Management Navigator series—to help you find your way to better profits and steer clear of potholes on the route. We'll provide more information on our Web site, and when we've completed the series, we'll offer it on CD.

Jim Kendrick, retired University of Nebraska grain marketing specialist, says the first step to better marketing is to make a plan and then set yourself up to execute it. Here, he spells out six steps to figure out where you are, where you want to go, and how you expect to get there.

That's not to say you are not able to change your plan—today more than ever, you need to keep some flexibility.

I  Compile Data.  Figure your cost of production. "The market doesn't care what it costs you to grow a crop,” Kendrick says. "But knowing how much profit or loss you can lock in helps you price.” Start with cash costs, add a labor/management charge, then overhead such as taxes and depreciation.

I  Set Goals. "It's probably safe to say that every farm business has the goal of making profits,” Kendrick adds. "But even with the same costs, debt level, growth mode, operator age and risk tolerance can lead to extremely different pricing goals and attitudes.”

A well-established, debt-free operator with a big bank account may only want to price ahead when unusually high profits can be locked in; relatively new, highly leveraged producers may want to price enough to cover all cash costs as soon as possible.

The important thing is price goals help keep prices in perspective as the market moves.

I  Establish Your Comfort Level. Based on your production history and crop insurance, decide what percent of expected production you would feel comfortable pricing prior to planting, after planting, approaching harvest, and out of storage.

"This can be difficult,” says Kendrick. "You must be honest with yourself about how you react to price changes. I have known farmers who literally can't sleep and experience digestive problems when they hedge and prices rise, causing margin calls,” he notes.
"I can point out that he has priced only a portion of his crop and the rest is rising in value until I'm blue in the face. Such a farmer probably should steer clear of futures and even cash sales, and rely on options, which set a floor but not a cap if prices rise.”

I  Set Entry Points. Based on Steps 1 through 3, write down the prices at which you will protect yourself against falling prices—and the percentage of expected production you will cover at those prices.

What if prices never reach your goals? Some farmers set calendar triggers as well. What if prices are rising and your original goal looks too conservative? A trailing sell stop is an effective trigger that results in a sale quickly if prices reverse. You decide how many cents you want prices to fall before triggering a sale or price protection. The plan works with selling futures, buying a put option or even making cash sales.

I  Inform Others. It's well known in dieting and treatment for addiction that a support group can help you "stay on the wagon.” Give a copy of your plan to your banker, broker and/or your spouse or other business partner so they can remind you that an entry point has been reached. This will force you to at least justify your reasons if you choose to ignore a trigger.

I  Post the Plan. Pricing goals must be written down, Kendrick insists. "Otherwise, you will conveniently ignore pricing opportunities as you foresee that once-in-a-lifetime chance. Posting the plan in your office, on the refrigerator or even in the bathroom will reinforce the plan. Not only your seeing it, but others as well, will remind you of your goals and entry points. Remember, a marketing plan that is not written and posted is no marketing plan.”

The Proof is in Execution

You may think it's impossible to map out a plan in the face of the historic volatility ag markets are facing. But a key fact to remember is that it isn't set in concrete; it can be changed when circumstances warrant. The power in planning is that it causes you to think through choices before something happens so that when it happens, you'll be ready—and not immobilized by confusion or fear.

Eric Zell of Cavour, SD, figures you have to lock in profits when they are available. "If you just wait to price at harvest, you generally won't do very well,” he says. "If prices are attractive, I'll sell 10% to 20% a year or more out. I make scale-up sales, 5% to 10% of my crop at a time.”

Because crops in Zell's area face fairly high weather risk, he generally limits his advance sales to the bushels covered by the 75% or 80% Revenue Assurance coverage he purchases. The last couple years, he's bought the crop insurance using enterprise units, which offer a savings on premium and prevented-planting protection on every acre.

Zell mainly uses hedged-to-arrive contracts and places sales orders at his local elevator to be made if the market reaches those levels. By mid-summer, if basis looks favorable or if there's a chance it will widen, he'll switch to cash contracts. "Placing orders is important,” he says. "Otherwise prices can reach your target and drop again before you get something done.” When one is filled, he sets a new target a bit higher.

Zell starts with an estimate of his cost of production, including cash costs, land and labor, for the corn, soybeans and wheat he grows. In December or January, he locks in his input costs so he has a better handle on what his cost of production will be. Then he adds about a 25¢/bu. cushion/profit as a starting point. His next target is usually 15¢ to 25¢ higher. He adjusts targets as he gets a better feel for how big his harvest will be.

Market outlook helps Zell decide where to start and how fast to sell. Sometimes plans need adjustment, he says. "If prices don't reach my targets, at some point during the growing season I may have to adjust downward, or consider storing.”

Click here for a "Grain Marketing Terminology" glossary from Jim Kendrick

You can e-mail Linda Smith at lsmith@farmjournal.com.


Top Producer, Summer 2009

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