Farmers' Corner August Issue Index

With prices as low as they are, it can be easy to let your marketing focus slip if you let it. The instinct is to hold on as long as possible for prices to recover, but do we really want to run that risk again? Many producers chose to do just that last year, and the combination of large quantities of grain left over from ’98 plus a good overall ’99 crop make it unlikely that the price will move dramatically unless something drastic happens.

We must get grain sold and used in order to free up storage space and cut down on the surplus of grain in the country. The government has come up with a marketing assistance plan that works — the LDP payment. With the LDP, you can get loan value for your grain, get it out of the country and into the usage pipeline, and not have to pay storage costs.

Prices are low, but your marketing job is still the same; avoid unnecessary costs and risks while exposing yourself to opportunity. With loan as a safety net you don’t have the usual downside risk of owning grain after harvest (other than the risk of more low prices for next year as a result of large amounts grain stored in the country), but there are costs involved. Using the LDP, you can get loan value for your grain and stay in the market less expensively with a Minimum Price Contract.

Here’s an idea that bears consideration. Sell new crop ’99 grain at harvest and collect the LDP. Then, purchase a Minimum Price Contract at the level of the loan rate. You’ll be guaranteed loan rate, and you’ll be in the market if the price moves above the loan rate. Your ’99 bushels will be sold at loan value and in the pipeline, and for a lower cost than storage you’ll be eligible for more money if prices move higher.

We’ll be glad to sit down with you and go over your ’99 crop marketing alternatives. You have more alternatives than the ones we’ve mentioned here, but we truly believe that your best choices are to either sell your grain at harvest, then take the LDP and walk away, or use some of the LDP money to buy an inexpensive Minimum Price Contract at the loan rate. If you would like to hear more about these alternatives, please give us a call or stop by the office. We want to help.

LDP Forms & Their Uses

Form 709 form709.gif (2598 bytes)

This form must be completed and filed with your county office prior to harvest. Then, as your grain is delivered to the elevator, you sell it and collect the LDP at the rate in effect on the date of delivery for each load.

Form 666

You deliver the grain and put it in storage. It must remain in storage until all bushels are delivered and you decide to file Form 666 with the county office and collect the LDP. Only after this is done can the grain be sold to the elevator. A warning; don't delay your decision. Once the grain is out of the field, sell it and take the LDP. You really don't gain anything by waiting. If the price goes higher, you get a lower LDP and a higher cash price. If the price goes lower, you get a higher LDP and a lower cash price. The results will be more or less the same whether you wait or not, and if you wait your grain won't move out of the country and you will be paying unnecessary storage costs.

How NOT To Use The LDP

Should you decide to file Form 666 to collect the LDP, you must deliver all bushels to the elevator and put them on storage, then file the form and collect the LDP. Once you have the LDP, you don’t have to sell the grain right away, but not selling can be disastrous. Why would a producer collect the LDP and not sell? It’s the old temptation to play the market creeping in again. The theory is this: if the price goes up, you have the LDP plus a higher price. DON’T GET CAUGHT IN THIS TRAP!

Successful farming requires careful risk management. Producers who took the LDP and didn’t sell last year found themselves in a bad situation. Storage costs ate up the LDP while prices continued to go south. Don’t put yourself at risk needlessly. Get the grain sold; get it out of the country and get it used. If you need to stay in the market, talk to us about how you can do it for a lower cost than storage with no downside risk.

What's The Point?

The Same As It's Always Been

"What's the point?" is the perspective of many when talk turns to entering targets for next year. With prices as low as they've been, it may seem a pointless endeavour, but take a look at prices for new crop 2000 -- they might be better than you think. A good rally could get 2000 prices back up to decent levels in a relatively short time.

A lot of time will pass between now and the 2000 harvest, and time is opportunity--opportunity that you can only participate in if you are prepared and in the market with a Target Contract.

Remember, it is when things are bad that you need to be more determined than ever to stay disciplined and stick to your goals: eliminating risk and selling at a profit.

We're accepting targets for harvest 2000 at any price. Don't let the current situation get you down and keep you from thinking about the future -- get targets in, get grain sold ahead at a profit, and be sure you're still here in the future.

Do You Have A Plan?

plansheet.gif (4190 bytes) One of the first pieces of advice a new business owner gets is to write up a business plan. A business plan outlines what the business will do, the financing it will need, what the product will be, how it will be produced, and how it will be marketed. Having a plan written out gives the business owner direction and something concrete to refer to when things get hectic.

If the overall business of farming comes up short in any one area described above, it is in the marketing plan department. All too many farmers simply don't have a specific plan for how they will sell their crops, or even what their goals are in making a sale.

Without a specific selling plan, it is all too easy to get caught up in a cycle that leads to worse long-term results than selling based on a plan. The cycle works like this:

With no specific selling goal, it's easy to get into the general mindset of "waiting for a good price". That and human nature make it easy to get pulled into a trap; the same kind of trap that captures so many in the stock market or at the gambling table.

When the price starts to go up, excitement kicks in. With no actual number as the definition of a "good price", and no way of judging what the results of selling at any one price will be, it's only natural to wait for the price to get a little better. The more it goes up, the stronger the desire to wait becomes.

If the price starts going back down, a mental goal is set -- we decide to sell when the price gets back to whatever it was before it started going down. All too often, the price continues going down, while we get more and more determined not to sell until it recovers. Eventually, when we need money to pay the bills, we sell at whatever the current price is. Of course, if the price does recover, part one of the cycle starts all over again.

Selling without a plan is like leaving on a trip without a map or any idea of where you are going. At most, you may have an idea that you want to end up "someplace nice", but if you just take random roads in random directions, there's no telling where you'll be when you finally come to a stop.

A selling plan can give you several important advantages:

A specific goal.

You can know ahead of time what your "good price" is, so you can use a target contract to get your production sold at that price.
More time to get it sold.

The sooner you get a plan done, the sooner you can get in the market to get your crops sold where they need to be sold. The longer you're in the market with a target, the more price volatility you'll be exposed to. The more volatility you're exposed to, the greater your chances of getting grain sold at your target price.
Mental relief.

A selling plan helps you avoid the mental and emotional wear and tear of the old price following game. Put in a reasonable target, get it sold, and you don't have to worry about marketing those bushels any more.

We'll be glad to help you get started with a selling plan. Give us a call or stop by the office and talk with us about how you can get on the road to better sales.

Should We Eliminate The Middleman?

Grain elevators are the classic example of an interfering middleman, right? The elevator makes grain cheaper by charging farmers to sell their crop. Wrong. Contrary to the beliefs of some, the elevator's objective is to connect buyers with sellers, not to buy grain at the lowest possible price.

In fact, the price of grain is of little concern to the elevator, which makes its money by helping both sellers and buyers.

Think of two neighbors -- one grows grain, and the other is a user. While the two individuals may be friends, it will be difficult for them to have a good buying and selling relationship. The grain producer wants to sell at a high price, while the user wants to buy at a low price. When one neighbor wins, the other loses.

Add to this picture an elevator a little ways down the road from the two neighbors. Because the elevator's margins don't come from the cash price of grain, it can help both neighbors meet their goals. It can buy the producer's grain when the price is attractive to him, and later sell the grain to the user if the price goes down.

With target contracts and a little price volatility, all three parties can get what they need out of the market, and not at the expense of each other.

Maybe the middleman isn't so bad after all.

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