Strong marketing skills are important for a successful farm, and a decision grid can help you make grain-marketing decisions.
The best way to make solid grain marketing decisions is by keeping informed. Having a marketing plan with reasonable profit targets means you can capitalize on marketing opportunities when they arise.
For an introduction to the topic, see the video Developing a marketing plan for your crops.
Why use a decision grid
Farmers are faced with more pricing and marketing alternatives than ever before. Should they price at the current bid for immediate delivery? Hedge? Forward contract? Lock in basis? There are many alternatives available; properly used, they can help manage price risk. However, farmers must know when and how to use each one.
There are a considerable number of pricing and delivery alternatives for marketing crops. Farmers must assess all of these marketing alternatives to make sound crop marketing decisions. Marketing alternatives and signals may be different when making marketing decisions about binned crop, where you have full information, and crop that is still growing in the field, where there is still uncertainty about yield, quality and grade.
This marketing decision process can be applied to all crops that use futures markets for price discovery.
The decision grid
The decision grid helps to analyze prices and breaks these prices down to their component parts – futures and basis.
The futures price is the price that is traded on futures markets. A strong futures price is one that is high or higher than expected under current circumstances. This does not mean the futures price is at or above historical highs.
The basis is the difference between a local cash price and a futures price. Note that “local” could refer to your usual crop marketing area or a larger area. A strong basis means that the cash price is considered as high relative to the futures market price. This usually means local supplies are limited or that local demand is strong. A weak basis means the cash price is considered low relative to the futures market. This signals weakening local demand or oversupply in the local market.
As marketers develop experience over time, they are able to determine what are historically strong or weak futures prices and basis levels. This decision grid can be used to choose your marketing tools based on what you expect to happen with the futures price and basis.
Decision grid scenarios
Figure 1. Market decision quadrants
Strong futures, weak basis
This is a signal to take action on the strong futures price and to wait for better basis. One way to do this is to sell deferred futures and store your grain. A second way to do this is to buy a put option, which sets a minimum price at which you may price your grain. A premium is paid to purchase a put option, but it provides protection from futures price downside while enabling you to capture higher prices should the futures price rise.
Strong futures, strong basis
This is a signal to price cash grain or sign a deferred delivery contract to lock in both the good basis and futures price.
Weak futures, weak basis
This scenario often occurs right after harvest, when many farmers are looking to sell and storage may be filling up. This is a signal to store your grain and watch the markets for opportunities. Wait for basis or futures price to improve.
Weak futures, strong basis
If futures prices are lower than expected, but local buyers still want deliveries, basis may be strong. A good approach here is to sell your grain at current cash prices to take advantage of the strong basis. While pricing physical grain you could purchase futures or call options to take advantage of any rally in the futures price. Alternatively, you could sign a basis contract to lock in just the favourable basis. Finally, waiting on the market to give a clearer signal is always an alternative.
They key to making solid grain marketing decisions is keeping informed. Having a marketing plan with reasonable profit targets and understanding your marketing alternatives means you can capitalize on marketing opportunities when they arise.