Why Grain Marketing Matters More than Ever

Friday, December 12, 2014

The long harvest is over. Ideal weather all season produced the bountiful crop anticipated. Corn stocks are now ample worldwide, creating (or worsening) an uncompetitive market. Virtually all market analysts agree these conditions will likely persist well into the 2015 crop year, challenging producer margins to a degree not seen for five or more years.

Demand has shifted long-term.

The problem goes deeper than high yields. It’s a fundamental shift in demand. Ed Usset, Grain Marketing Specialist with the University of Minnesota’s Center for Farm Financial Management, says in his blog: “The last seven years were extraordinary for grain profitability, and it is unrealistic to assume that ‘extraordinary’ would continue indefinitely. The grain complex was headed for a downturn in 2012, but the drought postponed the fall. In corn, ethanol demand…has flattened out in the past four years.”

Randy Christy, assistant vice president for Cargill AgHorizons and Merchandising Manager, agrees. “You’re going to need a dramatic event in production to turn this back into what we’ve seen in the last three to four years,” he said in our November 25 ProPricing webcast to growers. “If we get trend-line yields, we’ll continue this lower flat-price environment not only next year, but in the following year.”

With a long-term outlook in this condition, what’s your best strategy for those bushels out in your storage bins, and—not too long from now—for spring inputs?

Opportunities to sell positive margins can still exist on rallies.

We submit the answer is not sitting idly by. It’s getting familiar with all your grain marketing options, then positioning yourself for even small market upticks at a risk level you choose.

“Having a marketing plan in these environments is just as important as having a plan at those higher prices,” says Jeff Klock, Grain Marketing Solutions product line leader for Cargill AgHorizons.

In fact, mid-November provided a good lesson in what are sometimes unexpected rebounds. After falling to lows in October—typical during harvest—a $.30 to $.50 rally in the final stretch of harvest gave farmers an opportunity to market at or above their break-even margins. (See graph below.) It may not have been the exciting spike farmers wanted, but that recovery generated $60 or more per acre in revenue for some of our contracting customers.

December Corn

During this crucial window, Cargill was able to help hundreds of farmers manage the logistics of an over-sized crop, price bushels that needed to move immediately, and write a viable plan for bushels going into on-farm storage.

“Now that we are 40 to 50 cents off the lows,” Klock says, “our customer has been able to capture much of that on the grain he has in space, without having to sell much at harvest values. That’s a win-win partnership.” Did you get in on this opportunity?

You have options.

With snow on the ground and grain in the bins, it's reasonable to take a short wait-and-see period over the holidays—with decision-making in January after the new crop report is in.

If that’s your tack, study up on contract options for potential action early next year. Cargill offers a range of grain marketing tools to help manage your price risk while preserving control within your comfort zone.

Options range from making Firm Bid Offers at attractive price levels to market average-based Pacer. Terms come in variations including no-basis established (NBE) and flat-price or floor-price options. The unparalleled choice and flexibility of these combinations give you precisely what your situation calls for.

Give yourself the edge and explore these contracts on our website. We know it’s a lot to grasp. Call your Cargill Farm Marketer to walk through choices and calculate scenarios.

Contracts work.

To see the power proactive grain marketing can have, look at what happened with ProPricing contracts this year. Come harvest, our early bird customers (June-July) began delivering well over 100 million contracted bushels at levels $1 and $2 over the current market. How? They’d worked with Cargill Farm Marketers early in the season to develop and execute a marketing plan—and the strategies paid off handsomely.

In fact, the track record of ProPricing is a great representation of Cargill’s global trading skills across all contracts. After tracking the data for six years, ProPricing has paid farmers $240 million more for their grain than farmers who did not use ProPricing. Those farmers who use ProPricing consistently every year increase their average selling price 89% of the time.

The 2015 game plan.

That’s impressive during healthy markets, you’re saying. But what’s the game plan now, in a bear market?

According to Christy, Cargill’s trading will be very different than the aggressive marketing of 2012-2013, when many contracts were hedged early at 100%. He says they will probably trade in a narrower range, with a close eye on the downside to quickly buy back hedges as necessary.

“We’re going into a time of taking some risk off the table at margins that have been lower than we’ve seen the last 3-4 years, because it is not a bullish scenario we’re moving into,” says Christy.

This kind of nimble insight and discipline is critical to capturing the edge in a challenging market. It’s what Cargill does best. If you lack those traits on your own, get an expert partner.

“We’re moving into a time period where we’ll be range bound,” Christy says. “But we still believe we’re going to have an opportunity to sell December corn at higher values. It’s a building stock scenario but that doesn’t mean we’re not going to get opportunities to lock in prices that provide positive margin structures this next year.”

Fight inertia.

The most important thing a farmer can do in preparation for the 2015 crop year is be positioned to take action. "Growers will need to raise large crops and lock in a positive margin structure," says Klock. Estimate costs of your production (breakevens) at normal yields (APH) and be ready to make sales at levels that generate a positive return. Nobody can predict precisely what the market will do over the long term, and that’s why Cargill offers a range of tools that allow you to establish sales at profitable levels or establish a floor price and maintain upside price participation. Of course, your Cargill Farm Marketer is prepared to assist in evaluating your break-even levels and discuss selling strategies that can lead to marketing success, even in a down year.

Insight and discipline. It’s the best formula for base hits in a market short on home runs. Deciding to do nothing is making a decision. Whether you’re pondering those bushels in your bins, or those ahead in 2015, don’t fall into inertia. Position yourself for small, steady wins that can make all the difference.

Now what?

If you would like to explore grain marketing strategies and options for your operation, contact your Cargill Farm Marketer today. We’re ready to help.