Don’t Bet on Selling Your Grain at Market Highs

January 31, 2011 03:36 AM

Source: University of Missouri

Recent government grain reports showing low-end-of-year carryover stocks have sent corn, soybean and wheat futures prices upward at rates that make crop farmers smile. 

For most, their present marketing plan will be to hold and sell at the market peak.
“Rethink that!” says crops analyst Melvin Brees at the Food and Agricultural Policy Research Institute (FAPRI). “Hitting the high depends mainly on luck and is nearly impossible.”
Grain owners should have plans in place, now, for marketing both the old crop and new crop.
“No one wants to sell when prices are going up,” Brees says. “But, expecting these price levels to last until harvest time might be asking a lot!”
In other words, if prices can go up fast, they come down faster.
“We are in a complicated marketing situation, but it can be managed,” Brees says. In his University of Missouri “Decisive Marketing Newsletter,” Brees outlined several plans.
“Current prices offer profit opportunities that are well above typical break-even prices. Don’t let profitable prices slip away. It is one thing to pass up a good price on the way up, but don‘t miss it on the way down.”
Growers can set upside and downside price objectives to target sales. Brees admits that upside price is difficult to set in an uptrend. But, with prices at historic levels, targeting a higher price is almost sure to lock in a “good sale.”
Downside prices are easier to set; but more difficult to execute. Set a trigger price that will stop losses as prices drop.
“If the market moves higher, increase the downside price. This is called a “trailing stop.”
As prices go up, you avoid making a sale and the downside price continues higher. If the price drops, you are out of the market at the highest downside price objective.
Another strategy is to use futures options. Options cost money for premiums, but they are flexible and can protect a very profitable price while allowing retained ownership of the grain. Then the producer can sell the grain at a higher price later. The combination can bring a high average price.
The third option is more traditional. Spread the sales at intervals through the year.
If prices continue up after making the first sale, the season average price goes up with subsequent sales. If prices reverse, at least part of the crop was sold at those historic highs.
Some grain marketers follow technical chart prices to guide sales. Until the uptrend line is broken on the chart technical signals remain for continued upward prices. Sales are made when the chart line breaks.
For now, that trend line remains bullish, with prices pointed higher.
But, Brees notes that records for the past 40 years show that downtrends follow major uptrends within 12 months--or less. The current uptrend has run almost seven months.
“Many factors, from energy prices to foreign markets, can change a booming market,” Brees says. Having a plan helps prevent selling all at the low.
To read the marketing newsletters go to “Farmers Corner” on the MU FAPRI Website.
“You many not want to sell yet, but remember you have to sell some time,” Brees says. “Be ready.”


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