Grain Marketing for Dummies

[charliep]

My own advice is to get a little bit of background but the big thing is just do with a small volume. Lots of guys take the courses but run out of steam when they have to go through the paper work at the brokerage firm. Like farming you have to get your hands.

A second thought would be to remember futures/options are just a tool/method to accomplish something. Just like your tractor isn't a shiny green/red thing that impresses - its a part of your business that does things to make money. So the first question should be I want to accomplish this goal in my marketing plan - which one of the contracts including futures/options will help me do that.

Finally, have a clear understanding when you are hedging and when you are speculating.

[macdon02]

I look at it this way, I am long any time grain in the bin or field. Gonna seed next year? How about year after that? Guess what... Im long again. Id get grain in the bin and figure it was gold and maybe Id like to have a birthday party for it, cake and streamers and all my friends over..... Last Dec that all changed I switched to bear mentality, got some live quotes with a fancy charting package. Watching live quotes is nothing like watching barchart once or twice a day, I cant get a "feel" for a market without it. After using live for awhile things make alot more sense then before. Really cant appreciate a report day until you got 1 or 5 min charts of corn beans and wheat up. The velocity of money on shocker numbers is something else to watch. Lots of info you can get with these packages, depth of market ladder, (the asks and bids. Watching the market on report day gives a person alot more respect for it. Not quite so easy to hedge the farm knowing the possibilities. Do I trade? you bet, having skin in the game makes me pay attention moreso then just grain in the bin or crop in the crop. Not sure why cause 1 lousy contract is nothing compared to a whole crop. It takes alot of cajones to reown the whole crop, not to mention time to take care of it. Grain in the bin might be easier, less emotion. LOL

[theplowboy]

That is a great perspective Macdon.
I never really thought of it that way but you are right.
Need to reduce your long position.
thanks

[rockpile]

Let's put on the brakes for a second and just take a look at how this whole marketing (selling) system works. Is there not something fundamentally wrong with a system where you have to "buy" a price for a product you own? This whole squirrel cage suggests to me that it was created for one single purpose - to divorce commodity prices from commodity value and handing that value over to what are nothing more than carpetbaggers. Adam Smith described it best in "Wealth of Nations". Paying the producer just enough to cause him to produce again. And Charlie, that line between hedger and speculator is a fuzzy one, if it even exists.

[Braveheart]

Rock pile, correct analysis. If one overlays long term commodity charts with long term cost of production you find the charts converging or moving towards converging.

It's a poorly kept secret that commodity prices near or at breakeven keep the industry going. Farmers, the eternal optimists, will always chase that next monster crop, or record price or both. Breakeven keeps them in the chase.

The way to make a buck is to have production costs lower than average, or somehow sell for consistently higher prices than the average.

[macdon02]

Passed on to me from a VERY GOOD borker from Manhattan, Kansas. Cost of Carry Calculation = Cash price x interest rate x time(.083)one month commercial storage cost(he uses $.05/month. So for example canola at $9x.05x.083=.0375 .05= $.0875/month. Fwiw the ticker starts when it goes in the bin instead of the pit.

[Klause]

hopper did you sell any 7 dollar #2 hrs or $12 canola this fall?


Cause we did. we also own some paper right now.

[Klause]

Guess it may be hard to tell.... I was bugging hopper. Lol.

Got a 40 of single malt here... will bring it over on the weekend.

[cuban_assassin]

Thanks for the info fellas I appreciate and respect experienced opinions.
My concern this year is we need an average selling price of 10.50/bu out of canola to break even and 7.00 / bu for wheat to break-even in 2014. We are currently able to price into profit on our oats and peas. I am concerned that these prices or higher may not be attainable this crop year. What I am wondering is what can I be doing differently now to get as close to these targets as possible. Right now we can achieve $9.75 canola and 6.60 for wheat with some of our basis contracts. At these prices we are not priced into profit, so the question is what options, if any, are available to increase our returns.
I should mention if prices went up to our break even levels we would sell 90 % of our remaining production. Our break even numbers include our total cop, which includes labour and return on land and equipment.
Any thoughts would be appreciated. TIA

[blackpowder]

Our #s look similar, Cuban. Nobody can say with certainty we'll get those prices, but I think we should get close.
To your other question, my biggest problem is discipline.

[charliep]

rockpile

Perhaps it comes to the discipline factor that blackpowder talks about. A hedger is taking a position because they have a price they are happy with or at least can live with/contributes to their financial goals. You are going this way versus a cash contract because you want flexibility/not tied to a delivery commitment to a company or you are unhappy with the basis/think it will narrow. As John DePape has highlighted, a futures contract can also help you capture carry in a market by selling deferred months.

A speculator takes a futures position because they have a belief about the future direction of prices. They want to buy cheap (or in the case of grain inventory - store) and sell more expensive down the road. Not saying business replacement is wrong - just that long. Has been explained much better in previous posts.

The one thing a futures contract really makes you do is pay attention. You will get direct feedback on regular about how successful your strategy is. You have people who trade here but my feed back from others is that physical inventory makes it easier to ignore what is going on in the market.

Didn't post a new topic but I find the move in MGEX wheat today really interesting. March contract is down to $6/bushel again testing support. Will it hold? A good time to get long/buy calls?

As a futures market experience, right down a trade on paper. $6/bu wheat long. 5,000 bu contract. Total value $30,000. Margin $5,000 (my number/not real). Market goes to $7/bu. Value of the contract - $35,000. Profit on trade - $5,000. Return on your trade - 83 % based on $6,000 you have invested. Not a farmer way of thinking on replacing inventory but how a speculator would think.

What happens if the market goes to $5.50/bu. Value of contract $27,500. Loss on trade - $2,500. Value of your investment cut in half.

[charliep]

Need to fix a mistake.

As a futures market experience, right down a trade on paper. $6/bu wheat long. 5,000 bu contract. Total value $30,000. Margin $5,000 (my number/not real). Market goes to $7/bu. Value of the contract - $35,000. Profit on trade - $5,000. RETURN ON YOUR TRADE - 100 % based on $5,000.