Now that you’ve had a brief moment to relax after harvest, it’s time for the next marketing adventure! Let’s look at doing some pre-pricing of next year’s crop!
Why so early, you might ask?
Let’s look at what has happened over the last two years, production-wise, and see where that leads us.
Two years ago world production was down due to numerous weather related crop production issues. This put world stocks of most grains at extremely tight levels and pushed prices to historic highs.
This year we have a better than average world grain crop which has helped to rebuild world stocks back to very comfortable levels. This in turn is being reflected in lower futures prices over the past six months.
So looking to next year’s crop, if we end up with even an average overall world crop, world supplies will still be at comfortable levels. If there is another above average crop like this year, world supplies will build even more and prices will slide lower.
The reality is that for prices to improve next year we will need to see a major reduction in world commodity production somewhere.
In the U.S., drought conditions have vastly improved from last year. Rains this fall have helped replenish needed soil moisture, which is very good for the winter wheat crop that is already in the ground. Rains in India, Brazil and South America have also been timely, and will help improve the potential for higher production in those countries as well.
That brings us to where we are today.
Current prices are definitely lower than last year, but they are still profitable and that is the name of the game: ensuring profits on your farm.
World fertilizer prices continue to slump from last year’s highs and should continue to decline slowly, depending on what grain prices do between now and spring.
If you are working out your production cost estimates for next year, they should be down over last year due to this reduction in fertilizer costs. Now if you take the new crop grain values and calculate out your potential income you will see that there is still a decent profit there that you can secure by locking in some new crop tonnes at these values.
World markets are coming off of record high prices last year, production this year was very good and the production potential for next year is looking even better due to better moisture levels in key growing regions of the world. Locking in a profit this early in the game for some of your production is a smart business move to protect you going forward.
Income protection strategies
You need to decide what kind of pricing strategy you’re going to use, and how much you want to protect yourself.
You don’t want to make too big a commitment locking in forward delivery contracts this early — the risk of not being able to deliver is huge. Locking in 10 to 25 per cent of your potential production is probably about as far as you would want to go.
When locking in a forward contract you need to review the basis the company is offering so you can decide if you should lock in the basis now or leave it unpriced, with the expectation that it will narrow in over the next few months, allowing you to lock in a better basis later.
Another strategy you can use is buying futures or options contracts to establish a floor price for yourself. Your opinion of what markets are going to do over the next eight to 12 months, how aggressive you want to be and how much money you want to spend purchasing these contracts will dictate how far you can go in establishing your pricing protection strategy.
You may want to do a blended strategy by pre-selling 10 to 25 per cent of your potential production, then buying futures or options that would cover another 10 to 100 per cent of your anticipated production — again, depending on the factors mentioned earlier.
Again, there are only a few grains (canola, wheat and oats) that you can use futures or options contracts with as part of your price protection strategy, as these are the only grains that have actively trading futures contracts.
For other grains, your only choice will be to lock in forward delivery contracts with a handling company. For some commodities such as peas, if the companies don’t have any potential sales for the coming year on the books yet they may not offer you a price for new crop.
You need to balance your overall pricing risk between all of your grains and use the pricing protection strategies that are available for those grains that it makes the most sense for.
What grains are at the greatest risk of going down based on current market intelligence? If you can use futures or options, you could protect yourself more on those grains to offset the risk from the other grains that don’t allow as much protection.
At the end of the day it comes down to total farm profitability.
If you can only price protect your profit on certain grains, use those grains to protect your total farm profits overall, offsetting some of the risks from the other grains until you can start to forward sell some of those other grains to lock in profits there.
In the next issue we’ll look at using futures and options contracts as part of your farm’s pricing protection strategy. †