Forward Contracting Leads to Long-term Success

November 16, 2015 05:00 AM
Forward Contracting Leads to Long-term Success

Production agriculture is a constant game of unknowns. From fierce weather, to vigorous commodity prices, no year is the same. But experts say the beauty of marketing is eliminating one of the unknowns. 

“It's one of the best tools to use when farmers are getting going with their cash marketing,” explains Naomi Blohm with Stewart-Peterson. The forward contract is a great tool because they know exactly priced with the final price and when to deliver it."

“Whether they like the price, or it happens to be a year when prices are projected to be down and it hits breakeven or above, and there's an opportunity to lock in a profit, that's the primary function of a forward contract,” says ProFarmer Editor Brian Grete.


In a year like 2015, bleak prices mean farmers see less incentive in forward contracting. Considering the peaks and valleys of farming, however, sometimes you'll need to sell the crop at a loss. 

“I think the number one thing is do some pricing,” says Shawn Smeins of Rabo AgriFinance. “You can get paralyzed based off where our prices are today. You're going to have to lock in sometimes at a loss and this is one of those times.”

“It's not nearly as fun or as enjoyable as when you’re selling at really high prices and there's automatically a profit, but it's what's required in these type of years,” says Grete.

That's why Smeins' advice is simple. “I think the biggest thing is have a plan,” he says.  “I can't stress that enough. Studies have shown if you have it written plan, you're going to carry it through."

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He says there isn't one magic plan that works for everyone.

“My personal opinion is if you have a cash-rent model versus an owned-land model, you have different fixed cost measures. Maybe you can take a little bit more risk in the market,” says Smeins. “My general opinion is farmers aren't aggressive enough with the forward contracting. They sit back and wait, having more of an optimistic view of where the market is going."

But that doesn't always happen.

“Conditions change, fundamentals change, market situation is changing,  and you have to be flexible within that,” says Grete. “So, while you have a plan in place that has a strategy of selling at a profitable level, when you get to those prices, I think you need be somewhat fluid through that process and adapt as market conditions form.”

Grete says a good rule of thumb for forward contracting is to set sell targets. 

“At ProFarmer we look to forward contract anywhere from a quarter to a third of the crop by the time planting season gets rolling,” says Grete. “Then, we look forward to pollination period for corn crop, for pod fill and pod set period for soybeans, and look to be anywhere from a third to 50 percent sold. And i think after that point in time, until harvest, then you can probably get up to your insurance coverage level.”

Grete says if you can market grain in the top 25%  to 30%, that will help ensure you're in business for the long haul.  “Don’t try to hit the absolute high, because when you swing for the fence, you may hit some home runs, but you're likely to strike out as well,” he says.

To help hit the singles, doubles and triples, Smeins suggests looking at the various marketing tools available today that can help craft a solid marketing plan.  Those may include "commodity derivatives, where it takes the margin risk off,” he says. “At Rabo AgriFinance, we do a lot of things with commodity derivatives that really helps a farmer with his cash flow.”

“A lot of guys are telling us they don't have the ability to handle margin calls right now, their lines of credit are just thin and tight, so the best one is just buying a put straight out,” suggests Blohm. “You have a nice floor if the market rallies, and you can have full opportunity for upside.”

“Also, look at crop insurance as a tool,” says Smeins. “If (farmers are) carrying price loss coverage on their crop insurance, they can feel comfortable to market up to that level.... You can go home at night and sleep knowing you don't have the production risk: You got it covered by insurance, you know what the facts are with the cost of your operation and you can feel comfortable with that marketing plan.” 

Whatever tool you choose, make sure it's based on your margins, not the unknowns. “Leave the emotions out, stick to the numbers,” Smeins says.

And even then, Blohm reminds producers marketing isn't a once-a-year event. "The last frontier is always marketing. It's the one that people seem to not care for the most,” she says. “So, that's the one you have to develop the discipline, which also means making time for it every day, and also taking time to learn about the markets."


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Spell Check

Western, NE
11/16/2015 08:18 AM

  Why do you think I've got time to respond to these platitude type articles? I'm always working on marketing. Unfortunately, most crops will be sold at a loss this year as the article reads. Just what I want to do though is start speculating to recover what I lost in the "market." It's interesting to note, the Paris exchange and Australian exchange may fluctuate only a few cents a day either up or down, yet our markets fluctuate wildly. Too much retirement money in the hedge funds! Will a jump in interest rates bring that back into an equilibrium? Probably not.

Frank Kloucek
Scotland, SD
11/16/2015 08:31 AM

  What are the downsides of forward contracting? Ask many in our area who locked in corn and could not deliver it because of the 2012 drought. It also gives the buyer a locked in supply of grain. If the buyer has enough grain to meet their needs long term will not pay as much on the cash market ..........

Chappell, NE
11/16/2015 02:56 PM

  When will we see fuel, fertilizer, machinery or ANY other industry "have to take a loss"? Farmers who want to keep farming know they must sell on the CASH MARKET ONLY. It's impossible for the seller to win the buyers game. These agricultural parasites must be eliminated and what better time to do it than when our prices have returned to less than Grandpa got.


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