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Reducing Risk on the Farm: Tips for Better Grain Marketing

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Compeer Financial
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Grain
Home > Education & Events > March 2016 > Reducing Risk on the Farm: Tips for Better Grain Marketing
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By living and working on the farm we assume certain risks: our crop being destroyed by a hail storm, a fire burning a livestock barn, or commodity prices affecting our ability to be profitable or even break-even in todays grain market environment. We haven’t talked to one farmer who has admitted to not having property and liability insurance on their farm, and most all crops are insured under multi-peril crop insurance and/or a hail insurance policy.

When we start talking to farmers about commodity price risk management, the approach varies greatly versus other risks on the farm. Hope is used a lot in grain marketing, even though there are multiple ways to help reduce price risk as the year goes by. To most producers, grain marketing is not as enjoyable as using your tractor, or even some of the new precision technology, and especially not as enjoyable as harvesting the crop you spent so much time and money raising! The farming industry has embraced precision agronomic and equipment technology; however, grain marketing risk management advancements have not been as widely accepted and followed despite commercial (large grain companies) and investment banks trading commodities using these tools to their advantage.

Even though grain marketing is not the most enjoyable task on the farm, it is necessary in order to continue any successful cash cropping business. The question many ask is "how can I improve my grain marketing?"

Below are a few points we encourage our clients to consider to best position their operations during this period of compressed margins:


Challenge current mindset regarding managing commodity price risk.

If we sell, we still want the price to increase! Look at grain marketing not only in the present. If prices increase, sell more. Are we looking forward one to two years? In most cases we have some of the inputs (land is an example) locked in past the current year.

Commodity risk management should not increase risks in changing prices.

We’ve heard this statement many times: I’ve gotten burned using cash forward contracts or futures contracts. Risk management is used to reduce risk. If you are using these contracts to reduce risk you will limit your topside price potential as well as your downside price, (very similar to buying insurance)!

Sell in increments throughout the marketing year.

This includes pre-harvest marketing. Avoid putting off sales until late in the marketing year. Listen to the market; when opportunities arise, execute sales. A marketing plan can be very simple, and does not require the use of futures or options.

Get involved; it takes time and effort.

In order to understand how to reduce risk, you must understand how different strategies and contracts work. There are many educational options, ranging from a free self-study guide from the CME to individual training sessions.

Understand what affects the market.

Supply and demand is what we call “fundamental factors” affecting the market. Technical analysis is the study of historical trends to predict future price movements. This type of analysis is used by 'commercial' grain companies and investment firm “speculators” involved in the grain market.

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