Economist explains how to manage risks within grain markets
“There are a lot of risks in the grain markets,” says Kansas State University (KSU) Agricultural Economist Extension Specialist Daniel O’Brien during a KSU Managing Risk and Marketing Grain in 2021 webinar held March 5.
“The rare individual who can make tremendous decisions and successfully manage a farm from year to year is capable of great grain management,” O’Brien shares. “U.S. farmers make 20 to 30 cents per bushel. It’s not about finding the highest price, but rather, it’s about finding the extra 10 cents.”
O’Brien adds, “Finding this extra 10 cents can increase farmer income by 33 to 50 percent.”
Importance of a plan
Marketing plans remain the tested and true approach in planning for various markets, potential disasters and overall success.
“Several people, including myself have taken the old stale approach,” O’Brien expresses. “Farmers need to present a grain marketing plan which looks at things on the upside, while also showing what will happen if things go downhill.”
O’Brien explains a marketing plan should be a proactive strategy to determine the price of grain before and after harvest. Additionally, he shares a proactive strategy should consider price needs and objectives, storage capacity, crop insurance, risk acceptance and financial and cash flow.
“Crop production is a crucial consideration in a marketing plan,” O’Brien states. “A pre-harvest plan is important. Crop insurance can help with replacement bushels and help to fill forward contracts.”
O’Brien shares a marketing plan should include a call to action which includes bushel increments, targets and certain dates.
“A marketing plan can help guide decisions,” O’Brien shares. “It can also take the emotion out of marketing. Having a guide eliminates the question of when to sell.”
Creating a marketing plan
O’Brien continues, “When farmers are creating their marketing plan, they should look at seasonal sale prices. Having a strong pre-harvest plan can offer profitable forward pricing opportunities.”
“Researchers are always gathering data from past years to study seasonal tendencies,” he adds.
To create a marketing plan, farmers must first understand the different types of sales. Early sales are considered neutral or beneficial.
This is when seasonal trends are flat, O’Brien explains. Declining grain markets are considered bear markets, while bull markets are uptrending. Many farmers consider bull markets as lost pricing opportunities.
“Farmers need to have decision dates in marketing plans,” O’Brien states. “These dates add hard discipline to a market plan by relying on trends and pre-harvest strategies over time.”
Additionally, O’Brien recommends purchasing crop insurance. He explains crop insurance can help protect farmers’ production risk and will price 75 percent of expected corn cropbased on actual production history yield.
Small producer risks
Farmers may also look for contracts with lower risk, which are especially helpful for smaller producers, according to O’Brien. These contracts give producers the ability to forward smaller amounts.
“There are other contracts for small producers to enter,” O’Brien notes. “Miniature contracts are a good example of this option.”
O’Brien explains miniature contracts are an excellent option for small producers because they can make offers as low as 1,000 bushels.
“Farmers aren’t killing themselves trying to fill 10,000 bushel contracts like larger producers,” O’Brien explains.
This option can be extremely helpful for smaller producers to add into their grain marketing plan.
Madi Slaymaker is the editor of the Wyoming Livestock Roundup. Send comments on this article to roundup@wylr.net.
