Play The Market Or Play It Safe

If we could, we’d all sell at the top of the market and sit on our money until the bills were due. It doesn’t work that way, of course, which makes deciding when to market crops one of the most frequent questions we field. Our advice to many of our clients relates to risk. Understanding the potential impact of selling or speculating is a crucial component in your marketing plan. To illustrate our point we look to the following two operations.

Paul Owemall is 45 years old and operates an averaged-sized grain farm. He has two kids in university, and has expanded the farm throughout his career. He has significant fall payments to make for the next five years. Owemall has considerable debt, which has been manageable on the farm in the past. But there are many payments due November 1 and he’s carrying significant trade credit due to be repaid by February 1. Owemall has significant inventory in grain bags and is running short of patch tape.

Sammy Snowbird is 63 years old and very lowly leveraged. Snowbird enjoys no term payments, and plans to leave for Arizona in October. He plans to spend the winter golfing except for a rematch poker game with a man named Sonny. Snowbird finds himself flush with cash and is very optimistic about market potential for commodities.

PROJECTED STATEMENTS

Both Snowbird and Owemall completed projected annual financial plans last winter and are experiencing current pricing opportunities higher than those projected a year ago. They both have the opportunity to realize profits on their farms in excess of their budget. They both subscribe to external marketing services and are considered to be above average in their working knowledge of the markets. Our advice to both was the same.

First, we review their projections so that we clearly understand cash flow requirements and expectations. We need to look at current crop yield and pricing opportunities and compare them with what was projected. These sources of planned cash flow need to be confirmed in both cases.

In Owemall’s case, significant payments need to be made in the next six months and as a result a higher level of pricing is required to confirm cash availability. If Owemall wants to further speculate in the market he can utilize options to allow him to remain in the market. Snowbird, on the other hand, does not have the same cash flow demands and as such can afford to remain in the market and hold on to commodities.

After satisfying cash flow demands, the next step in making this decision for both farmers is to assess their risk appetite. Factors also requiring consideration include interest charges, storage restraints, anticipated capital purchases, storage losses and hauling logistics.

WHAT HAPPENED?

Well, after our discussions Owemall locked in just enough crop to cover his November payments. The rest he decided to speculate on anticipating rising prices. He was comfortable knowing his immediate cash flow needs were covered and plans to take out a cash advance when initial deliveries have been made. Owemall is not gambling with his cash flow — he is aware that he is, however, gambling with this year’s profitability. The last factor that played into Owemall’s decision was Agristability. We looked at his past five years and his established reference margin in the past fve years is very consistent and strong. Owemall wants either a very strong year or is willing to take the risk of a significant price drop. This way either he anticipates building his margin further or collecting.

Snowbird, on the other hand, locked in 80 per cent of his harvested production with two main delivery periods in early fall and late spring into summer. Snowbird feels that over his career locking in a profit has been a successful strategy. He’s also nearing retirement and so is not interested in high risk unless he has pocket aces across from Sonny. Snowbird’s Agristability margin has been very volatile the last five years. He sees an opportunity to lock in an above-average year and thus strengthen his reference margin for future years.

Who is right? Both the decisions are being made for the right reasons. Only time and the markets will determine who makes the most money. We don’t have control over either.

AndrewDeRuyckandMarkSloanemanage twofarmingoperationsinsouthern ManitobaandarepartnersinRightChoice ManagementConsulting.Withover25years ofcumulativeexperience,theyoffersupport infarmmanagement,financialmanagement, strategicplanningandmediationservices. Theycanbereachedat [email protected] and [email protected] or204-825- 7392and204-825-8443

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