Harvest is fast approaching. As everyone is more than well aware, prices aren’t exactly at profitable levels for many, if any, producers. Everybody is holding out hope that prices will rally at some point between now and harvest to give producers the ability to market grain at profitable prices. While we certainly want that to happen, you need to ask yourself the hard question anyway: what happens if prices stay depressed through harvest? What’s your plan for the physical grain when it comes off the combine if that is the case?
If you fall in the camp of producers with on farm storage, then you have the ability to put the grain in the bin and play the waiting game. However, for those who don’t have any on farm storage, you’re left with a choice: pay to store the grain or sell the grain off the combine for whatever price the market is willing to give you at the time. What if I told you there’s a third option that allows you to avoid storage costs but not limit yourself to the current market price? There is indeed a third option available to you, and I want to make sure you’re aware of exactly how it works.
The idea of grain reownership is actually quite simple. You harvest the grain, then deliver it to whichever delivery point around you makes the most sense based on basis, delivery costs, and logistics. That sale brings in cash flow and keeps you from having to pay to store your grain somewhere. Now I know you may be wondering, well doesn’t that leave me with accepting the current market price? And while you are accepting the current cash prices for you physical bushels, the marketing of those bushels isn’t ending there. After you make the sale, you turn around and “re-own” the bushels through the board of trade. If you want to have the same penny for penny risk/reward as you would by holding the physical bushels, then you buy the outright futures. This transfers the ownership of the bushels from the physical grain to paper, and allows you to hold the same quantity of bushels with just a fraction of the total contract value (right around 5% of total contract value). Say price goes up 10 cents after you make the cash sale and buy the futures, then you’re gaining an additional 10 cents of value on those bushels the same as you would if were holding the physical bushels, but without having to subtract any storage costs. Obviously, if the price goes down an additional 10 cents you’re losing the 10 cents, but you’d be losing that plus the storage cost if you paid to store the bushels instead.
At the end of the day you have to ask yourself, do I want to take the risk of prices staying depressed for months to come and rack up large storage costs? Or do I want to bring in cash flow and avoid those costs, while still leaving my upside open and letting time work in my favor?
Now for producers with on farm storage that have stuck around this long in the blog, I’m going to offer you a proposition as well. It starts by first asking you to consider how much you pay to move the grain into the bins and then out of again whenever you decide to deliver it. If that cost is little to nothing, then I completely understand the decision to take advantage of that storage. However, if that cost is higher than you’d like, then why not do the same strategy as I outlined above to avoid those costs and just deliver off the combine? Deliver the grain off the combine, buy the futures, and then sell the futures back whenever you would’ve pulled the trigger on pricing the physical bushels.
In markets like we’re currently experiencing, every cent matters, so you need to ask yourself if you can afford to pay the costs associated with storing your grain in hopes of higher prices. Cash flow is key, and selling physical bushels brings in cash to take care of operating costs, while then “re-owning” with futures afterward allows you to leave your upside open. If you want to learn more about how to take control of the marketing tools available to you, register for our upcoming webinar that goes in depth on how to do that . Don’t let the current market conditions get the best of you, take advantage of the options available to you to combat them. I’ll leave you with one final question, what’s your plan?
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