Manage Risk by Taking Control of Your Grain Marketing

December 5, 2013 02:45 PM
Manage Risk by Taking Control of Your Grain Marketing

A risk manager advises Executive Women in Agriculture on how to plan for 2014 profit margins.

In the face of 2014’s "extraordinary risk" for grain farmers, better marketing is critical to maintaining profit margins, a senior risk manager told attendees Thursday at Top Producer's Executive Women in Agriculture conference in Chicago.

Kim Burton with Top Third Ag Marketing laid out basics and advice for farmers to become better marketers in her three standing-room-only "Guide to Risk Management" sessions.

"Too many farmers focus only on production and don’t pay enough attention to price," Burton said.

"The time of year does not and should not dictate when you market your grain," she added. "Some of your best marketing opportunities occur well before harvest."

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Kim Burton with Top Third Ag Marketing urges grain farmers to be proactive, not reactive when it comes to marketing their crop.

Among Burton’s key points:

• Develop a marketing plan. "It doesn’t need to be elaborate," Burton said. "Know what your operation’s needs are." Previous tax returns are a good starting point to learn critical information about your farm’s finances.

• Combine effective crop insurance with your marketing plan. "Crop insurance is important and better than it used to be, but it basically protects ‘dead’ bushels," she said. "It’s not marketing."

• Use options and forward contracting to manage risk. Buy put options to protect unsold bushels. Buy call options on the grain that has been sold. "Never have puts and calls on the same bushel," Burton noted.

• Don’t become a speculator. "That means you’re guessing or hoping, not protecting your crop," said Burton.

Options can be used to manage risk and give advantages that other marketing techniques don’t. For example, the only money you have at risk is the option premium, commission and fees. Put options also protect your downside price risk but allow for upside potential. Call options allow you to sell cash grain but also keep your foot in the door to take advantage of price increases, she said.

Puts are used to set a minimum selling price but not a ceiling, said Burton. You pay a premium to set the price at a specific time in the future. "Puts can protect you if prices go lower," said Burton.

However, they also allow you to walk away and capture higher prices if the cash market goes up. "A put is like buying an insurance policy to protect against lower prices," she said.

Call options are used to take advantage of expected higher prices. They give the buyer the right but not the obligation to buy (or "go long") a particular futures contract at a specific time during the life of the option. "A call gives you the courage to sell your cash grain at whatever price," she said. "It keeps you in the game so you can take advantage of upward price potential."

A solid marketing plan will eliminate constant worrying about what the daily market is doing, said Burton, who is a former agricultural lender.

To become a better marketer, Burton offered these five points:

1. Take control of your farm’s marketing.
2. Quit making excuses for not marketing.
3. Don’t get emotional. Stay focused on your marketing plan.
4. Be willing to sell cash grain.
5. Develop a consistent plan and follow it.

For More Information
See full coverage of Top Producer's 2013 Executive Women in Agriculture event. Follow the event on Twitter: #EWA13.

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