Marketing grain crops in the good times can be challenging. But marketing when commodity markets are in rapid transition can be a death knell if not done in a way that greatly reduces risk, says grain marketing guru Bob Utterback.
Utterback, who is president & CEO of Utterback Marketing Services in New Richmond, Ind., says timing of marketing decisions is always critical, but when the cost of money begins to move upward, the window of opportunity for buying and selling grain for maximum profit can close quickly.
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Speaking at a recent meeting of the North Carolina Corn Growers Association, Utterback said, “Grain marketing is not about planning for success — success will take care of itself. What you have to prepare yourself for if you sell and you’re wrong — is having a game plan to account for movement you don’t anticipate,” he added.
“Marketing is completely opposite of what farmers plan for their crops. They plan for success and deal with adversity. You plant the crop, take care of weeds, fertilize it, take care of insects and diseases — you get a good crop.
“Conversely, in marketing grain, you can take all the right steps and still fail. Failure is usually due to some kind of unexpected change in the market. For example, a terrorist event occurs and oil prices jump 50 percent in two days,” he said.
The specialist contends marketing decisions at the farm level are wrong more often than they are right. And, when market prices are low, you better be right.
Utterback has a simple, common sense-based five-step marketing plan that he says will help farmers be right more often.
First, determine a target price. Know when to pull the trigger on buying or selling that will guarantee you a profit.
Second, know how much cash flow risk is involved when you sell a crop. Knowing risk and accepting risk are different, but must go hand-in-hand to insure stability of the marketing plan. Farmers must manage the emotional side of managing cash flow — not as easy as it sounds, Utterback said.
Learn to love the bear and learn to love a market call. If you are 50 percent sold and you get a market call, it means you’re making money. “My most successful clients start selling when the market goes up and they don’t stop until it starts going down,” Utterback said.
The Indiana marketing specialist gave several scenarios on how to make big money farming and selling grain. He used an example of an average size farm that produces 50,000 bushels of wheat, 50,000 bushels of soybeans and 100,000 bushels of corn.
For wheat: A farmer with 50,000 bushels of wheat. Over the past nine years the average price for that wheat was $133,000. If the grower took the last two years of the July contract, the average price was $309,000. No one is going to sell at the extreme high or extreme low, but plenty of farmers are going to make or lose money somewhere in between, he added.
For soybeans the average price for 50,000 bushels of soybeans was $461,000.
For corn, for 100,000 bushels the average was $451,000. The difference between the highest price for corn and lowest price for corn over the past two years was $912,000.
The big question going into the 2010 season is, “how do I harness this market volatility — that is sure to happen — and make it more profitable to me?”
The first step is to produce a premium crop. High yields, high quality grown under tightly controlled input costs will overcome some volatility in the market.
Second, control input costs without jeopardizing the premium profit. Selecting the right seed with the right protection built in, the right variety for a specific field, timely planting, pest management and timely and efficient harvesting all play a role in overall profitability of the farm, so all should be a part of the marketing strategy.
“Then, select a marketing plan based on the value of the crop. If you have a premium product to sell and you sell it at the right time, the chances are good for making money in 2010,” Utterback said.
“This year, corn prices at $3.50 a bushel may be a trigger. Efficient growers should be able to grow corn for $2.00-$2.50 a bushel. Winter and spring snow and rain, if it extends into the early planting season, could cut corn acreage as much as 20 percent. If that happens, don’t look for much improvement on 2011 corn prices.
“If July 2011 corn reaches $4.60 a bushel, the 31 percent improvement on corn, would allow growers to lock in before 2010 and 2011 corn is planted. Corn versus soybeans has been about the same the past two years, but may not be in 2010 and 2011. Already, the return on investment on corn has fluctuated from 28 percent one day to 18 percent the next week.”
In the Southeast many growers have to determine whether wheat is a weed or not. If they have over $5 a bushel in production costs, they may be locking in a loss at today’s prices, Utterback warned.
To be competitive every year with corn and soybeans, wheat has to get into the energy game, he added.
“Alcohol power has been good for corn and soybeans on a global basis. If oil goes to $65-$70 a barrel, buy oil long-term for farm use. In the long-term oil prices have only one way to go — up,” the economist said.
“If natural gas prices go up, the cost of nitrogen will follow it. If a grower is growing crops that require high nitrogen inputs, he should hedge to reduce risks.
“Long-term, most economists agree the cost of money will go up.”
Utterback said to not get in a hurry to manage the risk of inflation, but over the next 5-7 years it’s coming and interest rates will impact commodity prices.
Utterback contends there will be a drop in wheat acres this year of something close to 6.5 percent. About half the six million or so cut in wheat acreage will go to full season soybeans and half to corn. Record corn yields the past two years and a larger than usual soybean yield in the Southern Hemisphere will affect these prices.
“If a grower hasn’t sold his 2010 crop, he has to hope for the best. If he waits until June or July, it will be real hard to find much hope,” Utterback said.