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FARMERS' CORNER | |||
| "To Help The Producer Sell Better" | July 1996 1996 Number 6 |
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FARMERS' CORNER | |||
| "To Help The Producer Sell Better" | July 1996 1996 Number 6 |
It's been a wild year. In some areas of the country, farmers are not yet through planting, while corn is tasseling and shooting in others. Media coverage of HTA contracts paint a pretty dismal picture for some farmers and elevators. However, amidst the chaos, it's important to remember that the fundamentals that make for successful marketing are still the same.
Long-term marketing success can only be achieved through planning and execution. Fortunately, with the use of positive marketing alternatives such as Minimum Price Contracts, some flexibility can be built into a marketing plan. This can help producers cope with the market forces that tend to cause people to lean toward speculation.
New crop prices are profitable now, for 1996 and 1997. Don't lose your focus on what makes long-term marketing successful . . . selling ahead at a profit!
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This is a question being discussed by many farmers with their local elevator managers, advisors and even amongst themselves. The rise in prices over the last year has created speculation, "can prices go higher and is it time to hold grain?" The result has been a renewed interest in storage, deferred price and other "price later" alternatives.
A similar situation occurred 20 years ago during a period of high prices in the seventies. Farmers, convinced that prices were headed to even higher levels, chose to hold on to grain. Price later became the marketing alternatives of choice. Unfortunately, those that continued to use these marketing alternatives ended up selling grain for much less in the years that followed.
The answer for today's farmers is not to hold grain. It is selling at a profit and turning grain into money as soon as possible that leads to long-term success. Holding grain only adds to the cost; but, by making a profitable sale, you pick up the check at harvest and immediately start putting the money to work for you. Any good businessman knows that having the use of your money is one of your most valuable assets.
Now is a time when every farmer should feel good about the marketing opportunities that lie ahead. Today's new crop prices are profitable and we should be thinking about selling grain not storing it. Sure, there is uncertainty and prices could go higher. However, we can't let uncertainty, or even greed, cause us to revert back to the old habits, especially when more positive marketing alternatives are available.
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You probably know someone who has recently made the comment, "I forward contracted last year and it didn't work. I'm going back to selling the way I used to." Perhaps, you've even thought the same thing.
It's easy to look back and say, I should have done this or that. Hindsight is 20/20. However, you must be careful and not let these short-sighted thoughts interfere with your long-term plans and success.
Ask yourself , "did I make the best decision for my business with the information that I had available." If you made the decision to sell because it was a good profit, then you did! You should never regret a decision to sell at a profit.
What you could regret is letting what's happened this past year stand in your way of making another good sale. Reverting back to your old marketing habits could be a costly decision. Instead, keep reinforcing your long-term objectives of consistently selling grain at a profit. If you do, in the long run, you'll never regret the results.
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There's an old saying of "what goes up must come down." There is no way to predict when this will occur, but just as sure as the sun rises and sets, prices will retreat as supplies grow. High prices always tend to suppress demand. Livestock, dairy and poultry feeders cannot run profitable operations with high-priced feed ingredients. Some will be forced to reduce numbers in order to cut losses. The long-term effect reduces long-term demand.
With the marketing alternatives we offer, you can lock in very profitable prices and still have flexibility if prices do go higher. The next 5-10 years could be similar to the 1970's when we saw volatile markets. Don't let this opportunity to make profitable sales get away. Come by and talk with us about a plan that will set a floor and leave you an opportunity to get more if prices advance.
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Farming is a big enough risk due to changing weather. There's absolutely no reason to add to this risk by speculating on prices.
Aside from installing irrigation, there's not much we can do about the weather. However, we do have some control and choice when it comes to marketing. By using positive marketing alternatives we can consistently sell grain at a profit year after year.
Positive marketing alternatives include the Forward Contract, Target Contract and Minimum Price. A good marketing plan that includes these marketing alternatives give you the best avenue to achieve your profit goals.
| MARKETING ATLERNATIVES THAT CAN WORK FOR YOU!
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New crop prices remain in the top-third of the market! What a great opportunity for farming. Profitable prices last year, this year and next year. Isn't it time you think about selling?
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We realize that each of you have different financial positions. These positions have a bearing on what type of flexibility you need in your marketing plan. We can provide, through different marketing alternatives, varying levels of flexibility to suit your needs. In other words, we want you to feel comfortable no matter which way markets move. Feel free to come by our office and let us discuss a marketing plan to suit your needs.
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One of the key ingredients in any successful business is discipline. Lack of it has destroyed many companies and individuals. In a turbulent time, when all about you is "moving too fast," you need to remember that discipline is the foundation that good decisions are built on.
Discipline will help you stay away from greed (speculation) and fear (not being able to act) and insure that you take the right steps toward a successful marketing outcome. It is hard to do the things that you need to do to be a long-term profitable grain marketer, but it pays.
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You've read about them in newspapers and magazines. You probably know someone who has done one of these contracts. Perhaps, you've done one yourself. What we're talking about is hedge-to-arrive and roll forward contracts.
We can learn from the controversy that resulted from these contracts by understanding what's happened and why. However, one of the problems with the whole situation is that, in many cases, the circumstances surrounding the contracts are different. Contracts may be called by the same name, when in fact, the terms are quite different. This has created a very confusing situation. However, no matter what the contracts are called or how they were used, there are a few things that have become very clear and can help us to avoid bad decisions in the future. Here are three common problems that came out of these situations and how we can overcome them.
A lack of understanding or
an unrealistic view of the risks.
When you're considering a new marketing alternative, always make sure that you understand it completely and are aware of all the risks before you sign your name. It's better to stick with the simple contracts that you know work, than to take a risk on a contract you don't understand.
Hedging in the wrong crop
year.
Many of these contracts involved rolling futures positions from 1995 into the 1996 crop year. In reality what happened is that farmers were speculating on the spread and it got worse. Anytime you speculate, there is the possibility of tremendous risk. You can avoid this risk by being sure your contract states a specific price for grain delivered at a specific time. The only provision for rolling should be your inability to deliver the grain as a result of crop failure and, then, the rolling should be done immediately and directly to the next year's new crop future.
Selling options.
This is one of the greatest risks a farmer can take. The lure of contracts that involve selling options is that it pays you a little money; but, in reality you take on a lot of risk. Farmers entered into contracts that, in some cases, committed them to 2, 3 or more times the production than they could possibly deliver in one year. One sure way to stay out of trouble is NEVER sign a contract that involves selling options.
AVOID POTENTIAL PROBLEMS:
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Forward Contract