Pull The Trigger On Profit

September 20, 2017 05:05 AM
money matters

In today’s commodity-marketing environment, sometimes the best opportunities last only days if not minutes. The challenge for all of us is knowing whether a price opportunity is good enough. A large carryover, variable growing conditions, unpredictable weather, USDA reports, technical analysis and a host of other outside noise can make it very difficult to feel like we are making sound decisions.

Once we have considered the fundamental and technical conditions, we need to begin to design our sales strategy based on our own individual situation.

Basis Analysis. With the variability in production this year for corn, soybeans and wheat across the country, there is a tremendous difference in basis levels from one area to the next.

What are the conditions in your area? Are you in a location where supplies are quite large or where there’s a tremendous carryover from the previous year? Or are you in an area where yields are poor? Studying your local situation and having conversations with local processors can help you get a handle on not only why your basis level is where it’s at, but on where it could be going in the coming months.

Matching delivery dates for when processors want grain can pay big dividends on basis.

Keep your eyes open for spot-bid opportunities. If you don’t like the flat price but the basis is good, you can buy it back on the futures or buy a call option. At that point, it’s no different than having it in the bin.

However, you could have a margin call with the futures positions. But remember: If grain prices go down, you have declining grain value in storage. You just don’t have to write a check for it, so it’s less painful.

Flat Price Target. To establish a reasonable price target, we must calculate production costs to a price-per-bushel number. Total costs or cost per acre numbers are not good enough alone for sale decisions. During the growing season, we can use our five-year yield average to estimate cost of production. As conditions change, you might move that yield number up or down.

The expense side of the equation should be based on expected total cost and can be dialed in to the penny after final yields are known or adjusted along the way.

Next, determine your realistic profit-margin goal and add that number to your break-even number. A profit opportunity from here is not a guarantee. But if you do not have a price target to aim for, you will have no idea when to pull the trigger.

From here, set your sales targets that meet the financial need for your business. Be willing to use futures and options tools, or at least consider them. They can protect downside risk, leave the top side open or both.

Think Holistically. Make a checklist of the things you need to pay attention to during the marketing year. Focus on those areas and bring in outside help if needed to ensure disciplined marketing decisions.

It’s not a question of whether a profit opportunity will present itself. Instead, it’s a question of whether you will take advantage of that opportunity and to what degree. Design your specific strategy, and be ready to pull the trigger. TP


Your Marketing Checklist

  • Manage basis
  • Calculate production costs down to a per-bushel number
  • Evaluate your cash-flow needs for upcoming season
  • Determine sales increments (volume) needed to match cash-flow needs
  • Determine sales timing in months to meet cash flow
  • Determine your margin target (profit per bushel goal)
  • Review and understand tools needed to reach your profit-margin target
  • Review storage and logistics needs; match to basis and sales plans
  • Document the plan and adjust to the moving target as needed
  • Use the numbers and the plan instead of emotion when pulling the trigger on commodity sales


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