At a recent seminar in eastern Illinois, a producer commented that a lot of the old marketing rules don't seem to work anymore and asked what growers need to do differently.
This question comes up frequently, especially from those who stored too much '97 crop into this summer, then watched new-crop corn and bean bids drop close to loan levels in the western Corn Belt.
I called several friends who have traded grain for over 20 years and put together this list of important factors that have changed grain price patterns. I also have a list of suggestions on how you need to change your marketing plans to adapt to this new marketing era.
The first factor that has changed is market information. Farmers and global grain buyers have taken advantage of the information that is now readily available.
Think back to 20 years ago when growers received much of their market news by listening to farm radio reports or stopping in at the local elevator. Most grain elevators had a clerk who did nothing but answer the phone and tell customers where the grain market was trading. No one used a fax machine or email and the Internet was unheard of. Market-quote machines were expensive and only available in some areas.
Today, 90% of our customers have DTN or Farm Data machines and a growing number have Internet access. Growers are very aware of weather in South America and economic changes in Southeast Asia. Farmers have jumped into the information age. The old evolving bull market that would lead prices higher over three to five weeks now evolves in three to five days.
The second factor is commodity fund trading. Twenty years ago, three groups usually were trading in the grain futures markets: commercial grain companies, locals who traded in the pits, and small retail speculators. Commodity funds were just beginning to put together money to trade.
Commercial grain companies then and now tend to be value traders. By that I mean, on most days, these companies are scale-down buyers, scale-up sellers. This tends to lead to more orderly markets as large buy orders help hold prices together on the down days and large sell orders above the market limit gains when futures rally.
Commodity funds are momentum traders. They buy on strength and sell on weakness. As the amount of money in commodity funds has increased, so has the short-term trade volatility. Short-term trading patterns used to average 10 to 12 days low-to-low. Now the average is 6 to 8 days. It seems like the rally has just started and it's over!
The third factor is the evolution of the global marketplace. With the GATT and NAFTA agreements in place and more global free-trade proposals likely soon, grain prices will be influenced by events all over the world. The slowdown in Asian demand and large crops in China were global fundamentals that lowered prices at your local elevator this year. World supply-demand fundamentals are as important to know as the U.S. figures.
Here are three changes that I believe you should consider in this new marketing environment: First, make more sales to spread out your risk. In the late '70s, I usually recommended that growers make four sales. I now recommend 10 sales of 10% each. By making more scale-up sales of a smaller percentage, you'll usually end up with a better average price.
The second change is to use the merchandising tools that are available.
Most growers usually start with forward contracts on 20-40% of their production. The next sales of 20-30% usually should be made with futures hedges or hedge-to-arrive contracts. The latter are a great marketing tool as long as you hedge a reasonable percentage and place the hedge into the proper month.
The last change is the use of put options. These will give you the downside risk protection you need without making a delivery commitment.
By using these three tools you can get price protection on 80-100% of your crop, yet still have a lot of flexibility.