Three Popular Farm-Marketing Strategies
Apr 28, 2017
Click here for a free trial of the Brock Report.
In our experience at Brock Associates, the number one request we get when speaking or writing about commodity marketing is for examples. There are thousands of different strategies, but I want to oversimplify three popular farm-marketing strategies by applying them to specific (but hypothetical) examples.
For the purposes of this blog I am trying to be as unbiased as possible, but I’ll give you my opinion if you ask! Everyone has a different marketing strategy, and what doesn’t work for some may work well for others. Let’s assume no storage, one-third sales based on production history, along with cheesy farmer names.
1. Cash-Only Carl. When I say cash, I mean a commitment to deliver grain to a nearby facility. For simplicity, we’ll assume Carl can only set the futures and basis at the same time--flat price.
Carl has researched the seasonal trends of each commodity, so he is patient to sell. He will sell one-third before planting, one-third mid-growing season, and one-third at harvest.
Pros: Carl has a simple strategy that’s easy for his partners and lender to follow. He’s patient for a rally, and spaces out his risk. In theory, he’ll have a nice average. The elevator will margin his position for a delayed fee--sometimes a fee in the form of a weak basis. Either way, he does not need cash up front.
Cons: Carl has significant downside risk on his unsold production. Depending on the year, this could be damaging. He also locks himself into a delivery time and location when selling. It’s also not free to use the elevator- even though he’s avoiding a hedge fee by setting the basis too, the basis may be expensive in the form of weakness.
2. Options Owen. Owen will sell and deliver to his local elevator and has a brokerage account that isn’t affiliated with his elevator--two separate entities.
Owen needs downside risk protection to stay in business, but worries he’ll miss upside opportunities.
His plan is to sell one-third of production with the elevator and buy calls against that same one-third. He will also buy puts on two-thirds of his remaining production with intentions of selling another one-third to the elevator if there’s a growing season rally.
Pros: He’s comfortable pricing bushels because of having the calls. He has protection on the downside with the puts, yet has room to capture a price rally on the upside. Owen knows the premium expense of buying options, so he can plan cash flow demands ahead of time.
Cons: Options can be very expensive if the price stays in a sideways pattern. He is positioned for a volatile situation, but the puts and calls lowered his average price--a negative if there’s not a major move. Also, options are not penny-for-penny protection.
3. Futures Fred. Fred wants aggressive downside protection. He trades futures through a broker on two-thirds of his expected production. He prices one-third through the elevator to minimize a potentially marginable position.
Pros: Fred has nearly penny-for-penny protection when trading. Using futures with his broker, he has delivery and production flexibility, and can adjust to market trends. If the price falls drastically, Fred will be in excellent shape to protect himself on all his production.
Cons: With the reward of high price coverage, he has the risk of a marginable position and may miss a small portion of a rally while deciding on the trend. He must be prepared to use cash flow to protect his price and flexibility.
My key point is that high-reward scenarios also come with high risk. Some would argue the highest risk is doing nothing (selling across the scales). While it is risky to wait, it can also come with the highest reward. Waiting could put you out of business if you’re wrong.
It’s hard to know which strategy is best ahead of time. Each year is different. There’s no free ride with marketing tools, but you can find a great strategy with any kind of cash flow availability.
-Email Katie at firstname.lastname@example.org