Source: University of Missouri
Today’s commodity markets are extremely volatile, notes a University of Missouri Extension agriculture business specialist. Obviously, prices make a big difference in a grower’s profitability. So what is the best way for a grower to deal with price volatility?
“Since commodity growers are price-takers and not price-makers, the best thing you can do is create a marketing plan that will help you cope with the volatility,” said Whitney Wiegel.
“While creating a marketing plan may seem futile during periods of extreme price volatility, it is the best way for growers to reach their marketing goals,” Wiegel said. “After all, how can you reach your goals if you haven’t established any? How can you deal with market fluctuations if you have not made pre-decisions about what to do in alternative market situations? If you are only gauging your marketing success on how well you predict the price highs and lows, be prepared to feel powerless and vulnerable.”
Instead of always swinging for a home run, Wiegel suggest trying to hit a few base hits. “You may just be ahead at the end of the game.”
There are three basic steps in market planning: First, estimate your cost of production and break-even price per unit of commodity. Then estimate the outcome of different pricing alternatives and determine a price target and quantity to market. Finally, develop a means of keeping yourself accountable to your plan.
You can estimate your cost of production using the production and expense records you have kept for your farming operation. “Being able to calculate your break-even price is very important, as it is the foundation for your marketing plan,” he said. “If you don’t have production and expense records, consider developing a record-keeping system that will help you analyze your farming enterprise.”
After calculating your break-even price, you can set price targets or goals. “Consider your different marketing alternatives—from cash sales to forward contracts to futures and options,” Wiegel said. “Basis information for your local elevator will be necessary for you to analyze the futures and options marketing alternatives.”
The result of considering all marketing alternatives is to arrive at expected prices for all marketing alternatives, he said. “These expected prices can be compared with the cost of production. Whether the current expected prices exceed or are less than the total cost of production, the decision becomes one of marketing a certain percentage of expected production now or taking a risk that a higher price can be obtained at a future date.”
The final step in market planning is finding a way to keep yourself accountable to your plan. “Marketing can be an emotional roller coaster of fear and greed,” Wiegel said. “It is important to have someone to keep you accountable to conduct trades at your predetermined triggers.”
Accountability can be obtained by having another person know and understand the marketing plan. “Spouses are often in a good position to implement a marketing plan because they may not feel as attached to the production as the person producing the commodity,” he said.
Marketing clubs, brokers and business partners can also serve as accountability partners. Giving authority to grain traders to initiate a trade at certain targets can also be a way of keeping to the plan.
There are tools available from MU Extension to assist with record keeping, calculating break-even prices and market planning. Contact your local MU Extension office or search online at http://extension.missouri.edu