Effective marketing
by Philip Shaw
Tips and tools to market your 2009 corn crop
HINDSIGHT IS ALWAYS 20/20. Looking in the rear view mirror at past history always offers visions of what was right and wrong when it comes to our corn marketing decisions. Simply put, nobody knows what the futures and cash markets are going to do. The challenge for corn producers is to use all the marketing tools at hand, to effectively market their crop in 2009 and beyond.
John Bancroft, Market Strategies Program Lead for the Ontario Ministry of Agriculture Food and Rural Affairs in Stratford, Ontario offers the following suggestions. He commented that producers need to keep themselves informed in both the bigger more global futures market and the more local happenings in the cash basis market. Keep a handle on your costs so you are not put into a position where you are forced to market to raise needed capital. He also suggested you might try something else on a small portion of your crop versus your usual market strategy whether that's hedging with futures, options or something else just to gain experience and confidence.
There are a myriad of marketing tools available to effectively market the 2009 corn crop. Marketing tools such as cash sales, forward contracting, basis contracts, deferred price contracts, short hedges, long hedges, put and call options all come into play to effectively market your 2009 corn.
It is important to be comfortable with the marketing tools you may be using. For instance if you feel market conditions are right and your price expectations can be met, cash sales and forward contracting may be legitimate options. With cash sales there are no storage costs, it's easy to understand and your price is known. However, harvest prices can be low and you shorten your marketing window.
A forward contract specifies a set price, quantity and quality for your corn to be delivered on a specified date. It effectively eliminates the risk of falling prices and it's easy to understand. However, like cash sales, there is no potential to gain if market prices rise.
Basis is the difference between cash prices and the underlying futures month. Basis is like an elastic band, constantly moving up and down. Basis risk contributes greatly to price risk faced by corn farmers. A basis contract gives the producer the power to set the basis at a fixed amount and then lock in futures later for a specified delivery period. These contracts extend the marketing window and at the same time eliminate the risk of the basis changing. However, these contracts can be difficult to understand and producers must be cognizant of that.
Some producers may choose to fill their bins at harvest time. To protect the value of that grain, producers can use a short hedge. This involves selling a futures contract to offset the expected market position. When the grain is eventually sold and moved into the cash market, the futures contracts are bought back. This type of marketing option reduces the risk of falling futures prices and extends your marketing window giving you the opportunity to realize basis gains.
A long hedge is the opposite of a short hedge. It is often used to protect the value of grain, which is to be purchased. Buying a futures contract offsets the expected cash market position. These futures contracts are sold when the grain is bought on the cash market. Both the short hedge and long hedge would involve using a commodity broker and there may be margin calls involved depending on which way the futures move.
Put and call options can also help corn producers effectively market their 2009 crop, but it is a bit complicated. An option is the right, but not the obligation to buy or sell (in this case a corn futures contract) at a specific predetermined price called a strike price. Call options hold the right to buy the underlying futures contract and put options holds the right to sell the underlying corn futures contract. There are no margin requirements for either put and call options. Costs can be high and a commodity broker is required.
In addition to all of these marketing options producers can access marketing products offered by local elevators. For a fee, many elevators offer marketing avenues to take advantage of the more complicated marketing options available. The challenge for corn producers is to find a combination of marketing options, which maximizes their ability to manage their risk. Growing the 2009 corn crop is one thing, marketing it effectively is another.