Aired: January 2016
With the low commodity prices of 2015 likely to continue in 2016, many advisors recommend cutting costs. Meanwhile, growers are afraid that doing so may lead to minimizing the bushels they have to sell. In these times of tighter margins, it’s critical to look closely at on-farm finances and identify the available options to make a greater profit, such as with futures, options and overall grain marketing.
“Managing risk will be one of the bigger parts of farmers’ operations in the next couple of years,” says Matt Bennett, independent grain marketing consultant. “It’s times like this that we need to really fine-tune our finances and marketing heading into the next growing season.” In this episode of Profitability Matters, Bennett shares his insights on grain marketing and actions farmers should take in 2016.
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- Farmers can use futures and options to make sense of the market, especially when profits aren’t as high as in the past
- Choosing futures or options
- Futures are marginable positions
- With options, farmers know exactly how much they’re spending upfront and how much they can lose
- Both options include some risk, but that risk is more defined with options
- Producers just starting out generally prefer options to manage their risk, but as they get more in-tune with futures they may branch out
- With bills in mind, many farmers at the beginning of 2015 used an options strategy to get cash and protect their price, and it proved successful for many
- Farmers should set up a hedge and/or option account
- There is typically a simply online sign-up process
- They should also get the bank involved so the banker is aware and so they can offer the farmer advice
- Understand the factors that help determine basis, or the difference between the futures price and the commodity price at a given location.
- Production issues – 2015 brought production issues east of the Mississippi, and this also brought better basis.
- Local elevators – Some elevators sit on the rail while others require trucking
- Transportation costs – Today’s cheaper diesel prices impact basis as well
- Some farmers decide on a set time to sell grain, but because no time is bulletproof farmers should look more closely at grain markets
Want to learn more? Read our previous posts for additional insights into farm profitability: