Re-Evaluating Marketing Investment as a Line-Item in Budget

September 25, 2018 10:02 AM
 
The price-volatility for corn and soybeans as well as wheat (all classes) has done what it (price-volatility) usually does, Jerry Gulke explains.

The price-volatility for corn and soybeans as well as wheat (all classes) has done what it (price-volatility) usually does, that is to provide pricing opportunity for both producers and end-users and to uncover new and/or more demand as well as make our U.S. production more competitive. Think of what we would receive if all we had to determine price was what large commercial firms offered. The basis (difference between futures and cash prices) is just one item that bears witness to answering that question. 

Price Volatility has been and remains one of the most underappreciated item in determining gross income of commodities producers have at their disposal.  Price volatility, or the price-discovery process, and opportunity go hand in hand.  I have long suggested for decades that the  “investment” of utilizing the process of marketing should be a line-item on every producer or end-user’s short and long term budget.  Notice I used the term “investment” to describe the process, not a cost of doing business!   Unfortunately after a few decades of the marketing advisory business, there still seems to be a lack of understanding the difference of investing in marketing versus expensing.  

Investing means allocating money to inform, understand and execute in educating one’s self as part of the overall management process of profitability. Expensing means spending the money as a matter of business expense like seed, fertilizer, fuel, chemicals, etc.  While there is a benefit of those expenses, generally the cost expected to be expensed of gone!  Not necessarily so in a hedge account where prices of commodities we grow or raise (livestock) are locked in or not depending on the price outlook at various times.  The cost of hedging is an investment just like machinery, land, or building.  While not depreciable, it is an investment in the business process which, in theory, is returnable either in profits on hedges or in appreciation of the commodity hedged.   

There is a lot of speculation by the trade of just how many soybeans were sold in cash forward contracts or hedging in futures when futures were $10 plus.  I am not sure of the general public but do know what happened personally on my farm and family operations that 40-50% were cash contracted including a decent basis leaving the other half of production using APH to hedging in futures (paper trades) of which coverage varied from 0 to 100%, having lifted all hedges last week.  Based on conversations at farm shows and meetings in the N Plains, my suspicion is 40-50% of production was cash forward contracted there as well?  Hard as I might, I cannot justify rationale for not doing so?  Rationale that “well it was dry last year and I didn’t know if I’d get a crop” or the old saying that “he who sells what isn’t his’in, pays the price or goes to prison” .  Both are excuses but not valid reasons. 

The investment associated with managing the risk in futures/options on production not covered by cash forward sales, is about $2350/5000 bu. at about 4% --5% interest or $50/ 5000 bu or 1 cent/bu for six months.  Compare that to what an elevator costs to use HTA’s for example.   HTA’s relieve the stress of initial investment and stress of margin calls should prices not go lower, but an HTA user pays dearly for the luxury and the buyer locks in eventual delivery of the physical commodity which is what he is after in the first place—and you pay the price for doing so.

Some producer will say it isn’t in the DNA to use futures, and worse yet, a lot of bankers don’t understand the process.  Yet as farm size grows the working capital, which should include the investment of a marketing process (plan), also grows and has grown significantly and it (working capital) has become a serious problem for some in the past few years.   This may be true for the large, leveraged producer who has seen fit to expand and find money for that expansion including machinery that cost significantly more than 10-15 years ago, the last time corn/soybeans were at these price levels.  Yet the same excuse (reasoning) for not using risk management that utilizes the tools that have been available for over 50 years.    

If one considers that at a minimum a dollar/bushel could have been salvaged from the $2 drubbing soybeans received, that is $5000 return on the original $2350 margin investment.   I challenge you to offer a similar return to farming more acres at cost of production and the amount of needed investment to receive $50 per acre.  Granted we need other investments to be involved with agriculture, but looking at marketing as an investment in information, analysis, education and execution have been overlooked by producers and their financial partners for decades.

Buying put options at a commission rate that would choke a horse or sell and buy call options at an expensive cost both are tools to mitigate the need for savvy outlook or due-diligence and are used successfully by some, but I don’t relish the thought of sending good money after bad in an environment that is woefully lacking in profitability.

Bottom line is that it is time to take a few minutes to think over where we were nine months ago, the rhetoric in the media regarding Ag and the outlook versus where we are not and the outlook going forward.  Government seems to come to our rescue over the years including the tariff reconciliation attempt, but the world is changing and if not corrected soon, may not look like the world we cut our teeth on the last 40 years, not to mention the last year! 

Jerry Gulke
Contact info@gulkegroup.com
Phone 480-285-4745 or 707-365-0601

CHART COMMENTS:   Note the reversal last week in soybeans came at nearly the height of negative news----Whether short term or a recovery as we enter S American production and last half of US harvest remains to be seen. 

Nov2018Soybeans-CBT--GulkeGroup

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Comments

 
Spell Check

Fred T
Central, NE
9/26/2018 08:46 AM
 

  Who proofread this article? The grammar sucks! I have to disagree Jerry, margin money is an expense not an investment. An investment generally implies a return over a period of time greater than a year. Margin money is an expense that needs to be accounted for in your cost of production. If you don't raise the crop, why would you hedge? If you're a speculator, then it would be an investment of sorts. You need to budget margin money just as you would fertilizer and include it in what you need to receive for that bushel of commodity raised. Afterall, you're not always on the right side of a hedge.

 
 

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