What is a good price?

[charliep]

You will have to forgive my curling examples but they relate to how I would approach pricing this spring.

When you are a skip calling a shot for lead rocks, you have three alternatives.

Throw up a centre line guard (you likely are throwing lead rocks and want to set up a situation where you can at least slip a rock in behind the guard to steal a point).

Try to place two outside guards (you have the hammer and want to position yourself to take two points).

Put lead rocks in the house and let the other team shoot at them (you are in a strong position playing against a weaker team).

Your strategies on the grain/oilseed marketing side could be as follows.

Do some forward pricing based on your cashflow/profit requirments keeping in mind yield potential. This to me is like throwing up a centre line guard in that it provides the base to start your marketing plan in a year when there is at least some price downside potential.

If you are somewhat optimistic about prices but still want to do some spring pricing as a part of your markeing plan based on cashflow needs/profit signals, look at alternatives for establishing a minimum price/keep the upside open - these include grain company minimum price contracts, buying puts (guaranteed futures price) or forward price some of expected production/buy calls (use as a lottery ticket in case prices rally this summer).

If you are in a strong financial situation and are optimistic about prices, do nothing.

As a note, I like the idea of minimum price contracts in the coming spring but I will leave this discussion for others.

The point of this is that you are trying to set things up early in the game/cropping season to take advantage of opportunities/manage risk later in the game/year. You still have six rocks to throw after lead rocks/another 12 to 18 months to market grain so there is still lots of time to do some other things.

How do others think of their marketing strategies?

[ianben]

Lee I would bet your dad also did a bit of market research in his store.

No point priceing way below the opposition if you get a good deal/low cost of production.

No point trying to sell at $10 if the same product can be bought for $9 across the street.

Is it just as important to know the other guys cost of production when deciding on a good price.

This is an area I find very difficult to find facts yet I am sure it is the way most products are priced today.

We all try to produce the highest yeild for the least cost already so knowing the exact figure does not help that much in my opinion.

We still need to maximise the profit in the good years to see us through the bad.

Could advisers like you give us a recomended price and ideas on competitors cost of production.

A while back Tom and I agreed $7/8/bu would be a good price for canola.
I am sure most farmers would be happy at this level too.

Would imports flood in from other countries or would they send less having payed their debts sooner?

I am sure the cost of Roundup has more relation to what Monsanto thinks I can afford to pay than their cost of production.

I am sure the price of Wendys A&W and Burgerking is more closly linked to the price of a BigMac than their individual costs of production.

Lets stop argueing and learn about marketing.

There are other ways apart from futures and our own costs.

[Steve]

The right price for grain has to be calculated on a average crop.

I can’t understand why some farmers say they can’t calculate their input cost early in the year and on the other hand say they have all these management skills. ( this is your formula ( !-&%*$@#? )

Charliep: your last comments are excellent and people should read them more than once, because all the marketing options are there for next year sales.

This is one way to establish a reasonable price for a bushel of grain. Farmers have a tendency to throw everything in one pile, and then try to dig out solutions for their problems that are not in that mess.

Start by listing your last years input costs for: fertilizer, seed, chemicals, fuel and bank loan charges ( if you need a loan for operating )also check your suppliers for this years prices for the same products. Now use your farmer management skills to come up with a pretty reasonable cost estimate for this year.

Look up your fixed cost and add it to your input cost. ( include land rent, land taxes, crop insurance and labor ) Make sure you add your labor at a realistic rate. ( no coffee shop hours )

Use a five years average yield for each crop to calculate the cost per bushel or tonne, and add 10% profit to arrive at the sale price of grain.

If the yield goes up, your profit is better or you can sell for less to compete in the marketplace.

If the yield goes down then the crop insurance plan should kick in to pay you the difference.

All countries will have a different input cost and this is where insurance and/or subsidies are activated.

Now you have to take a good look at your operation and determine if the land base, equipment, people to support and lifestyle is in the right ratio.

The price should be compared with other farmers in your area. This should tell you three things: Your grain prices are too high, too low and if they are not average, you better take another look at your operation.

The biggest problem will be to get farmers to cooperate and exchange price values.

Coffee shop BS prices are not reliable.

[TOM4CWB]

Sorry Steve,

I guess I am not good at explaining myself!

Risk, how do I cover off risk on a high risk production season, like a year like 2002?

First tool this early is to know crop insurable values.

Example:

I hedged $290/t Dec 2000 Canola for Sept 2001 delivery.

Crop Insurance value for 2001 crop was $290/t (variable rate July price).

If I was short for my hedge, the buy-back price in Sept of 2001 was about $325/t.

For every tonne short below crop insurance coverage(80% coverage is around 65% of average normal yeild), I not only loose the $290/t, but an additional $35/t to buy Canola from someone to fill the hedged priced contract!

In this senerio I loose my crop insurance coverage plus $35/t to pay to repurchase grain for the hedge contract!

Now I can buy a Nov. 2002 $330 Call back at $25/t to cover off my risk, but at an increased cost of production equal to;

35bu/ac divided into $25/t equals $20/ac additional added cost for my average normal 35bu/ac crop!

Now, what were the chances of Canola dropping $20/t below $310?

Now that Canola is $334, this reward is slightly better, but is $314/t enough?

It still doesn't reach the $7.00- 8.00/bu, so if I am not willing to take the risk on myself and self insure, I would say we are still at least $10/t off a serious hedge program start for 2002 fall Canola.

Does this make sense?

[Steve]

Tom4cwb

Your market procedure comments I understand very clearly, but slow down because it is to early to start marketing your 2002 crop, ( in a possible dry year ) and like Charliep said maybe do nothing. The weather rumors will kick the market around for a while, but if you’re a gambler then go for it. ( not good management )

Regards Steve.

[TOM4CWB]

steve,

We learned that if things end up the way they are headed, we could end up with production of 150million metric tonnes of Soybean production in the 2002 calender year. When we produce between 5-8mmt of canola in Canada, we are a drop in the great bucket of the world veg oil supply!

I am not suggesting to do the whole crop, but I thought we had consensus that between $7-8/bu was a fair price for Canola!

If we do not stick to a logical marketing plan, then CWB marketing with all its pitfalls is better than letting greed and fear rule our marketing plan!

The customers that buy our Canola oil need to have our commitment that we are cued up and ready to produce in 2002 when it rains!

Does this make sense, or do you believe we can loose a crop in January?

[rain]

Tom before you do anything with new crop canola check and see what you can sell feed barley for. Calgary region December delivery is $147.80/MT delivered. Canola still needs to buy acres. Plus carryout for canola is still forecasted at 400,000 MT this and next year.

At this time I would be more inclined to hedge some barley as opposed to canola.

What do you think?

[TOM4CWB]

Rain,

On the feed barley vs. Canola issue,

$147 is about 10-12 below cash price today it looks. The WCE futures are at $150 Oct 02, nearby at $157.

Nov02 Canola was at $337 when I checked it this morning with nearby at $354

The spreads have really narrowed on Canola, the basis at the local elevator are probably what are risk to narrow more.

It looks like both barley and canola are at profitable levels!

$3.20 for barley @ 85/ac is $272/ac
$7.42 for canola @ 35/ac is $260/ac

Last spring these prices would have looked really attractive, why not now for a beginning 10%?

[rain]

I would be more inclined to do some barley but would hold off on canola. Barley carryout is expected up next year while canola carryout is expected to stay the same. I think there is more reward in holding off on canola pricing, barley has the most downside risk.

Your Thoughts.

[charliep]

I would do a little of both crops but only light (no more than 10 % as you suggest Tom).

Just a question to you Rain - what are the new crop feed barley basis levels being offered? I have heard $10/t but haven't confirmed. This seems wide relative to the past 2 years.

Would a farm manager be better to hedge (realizing the potential implications of margin calls) versus sign a deferred delivery contract?