From Our Farmers: Diversifying Your Grain Marketing Plan

September 28, 2017

Farmers love to grow grain but don’t always feel the same way about having to sell it. Before you start thinking about diversifying your grain marketing plan, the first step is to realize that your job is to both grow and sell grain, not just to grow it and hold it for a high price.

Start selling your grain at the right price

Today’s Agricultural Environment

At 52 years old, I can't believe the amount of changes that I’ve seen in farming during the last ten years. Growing up, my parents always told me to read, and never stop learning. That advice is so true in today’s markets, where a farmer has to stay informed and remain flexible. If you want to develop a diversified grain marketing plan, you’re going to have to be able to change with the markets. Before 2007, we were primarily a "river market" and now we have river, rail, and ethanol plants. That provides us with "basis" opportunities that didn't exist before.

What’s happening in agriculture is that a lot of farmers just want to grow the crop.

There is a romanticized idea of farming as a way of life that doesn’t always include all of the time you spend behind the desk running the business. Our profit margins are continually getting squeezed, and the guys who manage their risk are gonna be the ones left standing.


FarmLogs Planner
FarmLogs Planner

Software like FarmLogs enables the farmers who can manage risk and are not afraid to forward contract the chance to grow their operations, and that's probably not what your neighbor wants to hear. As a farm operator, you have to grow the crop, do the balance sheets, the marketing, and the taxes.

If you're going to be successful you have to not only grow the crop, but also manage your price risk.

We have different people focus on production and price risk. One person is in charge of growing it and another person is in charge of selling it. You really have to know your numbers, work together as a team to manage your data, and remove the emotion of selling your crop. If you can't pull the trigger and sell the crop, then you should give that responsibility to someone who can or who has the time to help you. There are many marketing firms that will help you develop and implement a plan. And if you make a mistake (hey, who hasn't made a mistake in their life?) that’s the best opportunity to learn how to improve.

 

Benchmarking your Strategy

Before you can improve your marketing plan you have to assess where you’re already at. Ask yourself,  "What did I end up selling my corn for last year?” and, “What was the USDA's national average price that farmers received for the year?" Then, take a look at your selling history for the past five years and compare that to the USDA/NASS "market year average price" that is used to compute "County ARC" payments.

Your goal is to sell your grain better than the "average price received" by farmers. If you can grow more bushels and sell them higher than the national averages (adjusted for your location), you are doing a great job. You can get the market year average price for grains at many locations such as the University of Illinois farmdoc website.

If a farmer goes out and looks at his corn fields and says, "my corn looks bad compared to my neighbors,” you know know he’ll go out and change something, because everybody can see what’s in your field.

Even though nobody can see your marketing plan, that doesn’t mean that you shouldn’t be investing more time into building a plan that’s optimal for your operation.

Once you’ve assessed your current marketing plan, then you can start to set new goals for yourself. Let’s say you didn't beat the national average price last year. Your goal this year could be to make a small change to your plan. It’s important to only make small, rather than drastic changes, so you know what works and what doesn't. From there, maybe you’ll decide to set a goal of having a minimum of 25% of your Average Production History (APH) sold by the time July 15th comes around.

If you’re having trouble deciding how to market your grain, ask yourself, "What type of marketer am I? Do I forward sell? Do I not forward sell?” If you don’t sell until the crop is in the bin, you have to ask yourself if you can or need to change the way you do business.

Bean harvest

Becoming a better marketer

If you want to become a better marketer you can’t be afraid to sell your grain before it’s in the bin. It’s also important to have a broker and a banker that you trust.

If you’re willing to expand your marketing window to the winter before the growing season begins instead of only when the "crop is in the bin", you’ll see that there are usually some great pricing opportunities. If you don’t forward contract, you really only have one year to sell your corn, from October 1st to September 30th. But a farmer who forward contracts his corn has two to three years to set prices.  

If you’re asking yourself why you should start forward contracting, you can begin to answer that questions by looking at the markets outside of the U.S. 

South America's harvest gives us the opportunity for two weather markets every year. That region produces a lot of grain that the world depends on, so it's important to watch because what's happening in South America is going to have an impact on what you should be doing here. For example, if it's dry down there, that may mean that you might not need to be in a rush to start selling this year's bean crop, or it may provide the chance to make catch up on sales of extra bushels that you produced.

It should be noted that there is some risk involved in forward contracts, and weather is one of those risks. It may rain too much, it may be a drought, but these things are unpredictable, and usually major weather events like droughts don’t happen every year. If you’re nervous about the risk, start small, maybe around 5 of 10% of your crop. Never forward contract 100% of your crop, because you always wants to have a diverse marketing plan to mitigate risk.

 

Scaling your marketing plan 

Try to scale into any new type of marketing plan, and remember, you’ll always have to be able to adjust your plans according to what's unfolding.

Say you're sitting at a BlackJack table and you, the farmer, is the gambler and the dealer is Mother Nature. If planting gets done on time, the dealer's got a good card. If it starts to rain on time and you get timely rain, the dealer's got another good card and it's going to make it harder for you to get the selling price you want. This is the point where you have to start taking some chips off of the table by forward contracting.

Many years the best prices are available before the crop ever gets put in the bin. My best sales are usually the ones I was most afraid to "pull the trigger” on.

 

Historical Corn Prices Chart
Historical Corn Prices Chart


Every farmer wants to sell at the highest price. T
o avoid getting greedy and missing out on top selling prices, set scale-up target prices and percentages of your crop that you want to sell in that top price range. You're never going to sell 100% of your crop at the highest price.

One last thing to remember is that the market doesn't care what's in your field.

The market cares about what the growing conditions of the Midwest are as a whole, does. If 90% of the Midwest was getting rain, corn's going lower. And the market doesn't care if it didn't rain on your farm. A good rule to remember is that you adjust the amount bushels that you sell based on what is in your fields and your timing of sales are based on what's happening in the Midwest.


So remember:

  • Before you make changes, assess your current plan—it’s important to benchmark yourself against industry standards.  

  • Identify and define areas for improvement in marketing—this will help you know what direction to improve your marketing plan.

  • Set goals—if you're going to achieve something, you have to break it down into small, measurable steps..

  • Find a banker and broker you can trust—expert advice can go a long way.

  • Stay true to the type of marketer you are—eventually, everyone has their day in the sunshine.

  • The best sales price will always be the ones that are most difficult decisions to make.

  • Don't be afraid to split futures price and basis into separate transactions as you become a more advanced marketer.

  • You have two potential weather markets on your side because of the North and South America growing seasons—this provides you with a lot of opportunity.

 

Further Reading
Thinking about your marketing plan? Our Grain Marketing Strategies Decisions Guide can help you understand the benefits of different strategies so you can find the best fit for your operation.


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Dave

Author

Dave is part of a family grain and livestock operation in Wisconsin.