Price checking your grain market strategies

Have you reviewed your market strategies and are they keeping up with changes in the market environment?

Historical price and basis patterns become critical when considering market strategies.

Marketing grain requires understanding futures prices, cash prices and basis. It also requires understanding the market environment itself. However, predicting what that environment will do is similar to weather forecasting. There are a number of factors that indicate what will likely happen, but much remains unknown ­until it actually happens. The most we can do is mitigate our potential risks and position ourselves to take advantage of any opportunities that arise. With grain marketing, there are several ways to mitigate risks and secure opportunities for better prices. Mitigating risk begins with your market strategies.

Start by identifying your cost of production and minimum prices needed to break even. Set price targets that are at least equal to your farm’s cost of production, including cash flow needs. Keep in mind that the market may not offer a price equal to or above your cost of production. If prices are low, your marketing strategy should be to minimize losses as much as possible. Minimizing losses may be true for both old and new crop strategies.

Old Crop Strategies 

Once you’ve gotten past the harvest months, your ultimate marketing goal is to sell all of your remaining grain production. To meet that goal, you need to have an exit strategy for how and when grain will be sold. Exit strategies should be intentional, deliberate steps on how to steadily deliver all remaining grain for sale.

Once pricing targets are set, the next step is to consider when grain needs to be moved. Ideally, no grain should be held in storage after July 1. The main reason is based on supply and demand. Once July is reached, the market environment begins to look towards the fall harvest for its supply needs. A new crop means an ample supply of bushels and prices usually are lower with that in mind.

That doesn’t mean that all good pricing opportunities are gone during this period. However, before you decide to hold grain into a summer market environment, you need to read the pricing signals.

Carrying charges are one of your first pricing signals. A carrying charge is the difference between two futures contract months, such as May and July. If a large difference between prices exists, signals indicate that your market is willing to wait for grain. Waiting to sell may be worthwhile if you have access to affordable storage. If the difference is small or zero, the market doesn’t want to wait and wants your grain now!

Basis is your next pricing signal. Basis is the difference between futures and cash prices. It is based on a specific delivery month and derived from the costs your local grain elevator pays to ship, storage, manage purchased grain. This means that basis can be different from one elevator to another. Often depicted as a negative value, basis is often shown in an equation:

Basis = Cash Price – Futures Price

Let’s look at an example of carrying charges and basis at a local grain elevator:

Month Futures Basis Cash
May $4.4675 -0.30 $4.1675
June $4.4675 -0.25 $4.2175
July $4.4675 -0.25 $4.2175

In this example, the futures price of $4.46 is identical between May and June futures contracts. With identical prices, there are no carrying charges between the three months. The carrying charge price signal tells us that the futures market wants your grain now. Local markets are a different story. Basis is stronger in June and July at a negative -$0.25 compared to May at a negative -$0.30. The cash value of June and July is slightly better at $4.21 versus May’s cash value of $4.16. The basis pricing signal in this example tells you that the local grain elevator wants grain later in June or July.

If pricing signals are mixed, like the example above, consider contracts or pricing decision tools that match your market expectations. Decision tools help you lock in either basis, futures prices, or a cash price itself.

If futures prices look favorable to you, while basis does not, consider a hedge-to-arrive or HTA contract. A hedge-to-arrive contract will “lock in” a futures price for a specified delivery month while leaving the basis open to hopefully get stronger. The advantage is that if the futures price is favorable and basis does get stronger, you’ll net a higher cash price.

If you’re not sure what futures or basis will do, a minimum price contract could be your best option. A minimum price contract sets a price floor that guarantees a current cash price is your minimum price received at delivery. It allows for positive movement of either futures prices or basis but does require a fee to use.

Some grain elevators may offer a type of minimum price and hedge-to-arrive combination contract. Combining the features of both contracts, this option attempts to capture a limited range of upward price movement, while offsetting falling price risk with a price floor. Local grain elevators may vary in their use of these types of contracts. Differences may include calculation of prices, use of options, or limit gains to upward price movements only.

New Crop Strategies 

Let’s not forget about pricing your new crop grain. The same pricing signals used for old crop strategies also apply to your new crop. However, basis and carrying charges combine with logistics of storage capacity to help decide when to move grain. Many farms don’t have enough storage capacity to hold all of their expected production through post-harvest. So, some grain often must be delivered and/or sold.

Another key difference is strategically locking in prices for your “expected” production. How many bushels to expect can cause some hesitation in how much to contract. Crop insurance can help provide some guidance on bushels to pre-harvest market. Once you’ve identified how many bushels to market, you can select pricing decision tools to help navigate the pre-harvest environment.

A hedge-to-arrive contract can also work with new crop strategies. As described with old crop strategies, this contract may be an option if futures prices look favorable while basis does not.

If you think futures may increase and are concerned the basis may get weaker, a basis contract may be a good option. Basis contracts essentially “lock in” the difference between futures and local markets. You only have to decide what futures price to select based on your delivery month. To help identify basis in your area consider using Purdue University’s Crop Basis Tool:

There is also a third decision tool to consider. The cash price being offered at your chosen delivery month may be a good price. This is where a forward contract would work best. A forward contract allows you to lock in both basis and futures price for your intended delivery month.

Marketing is not easy for even the most seasoned grain producers. Especially if the market is full of unknown factors that could dramatically shift price direction. Pay attention to trends in the two components of market price: futures price and basis. Make a marketing plan that uses a few different marketing tools and provides an exit strategy for selling your grain. These simple rules can help you better manage your risk and improve your chances of locking in profitable prices.

To learn more about grain marketing and pricing tools, review MSU Bulletin E-3416: Introduction to Grain Marketing. MSU Extension also offers an Introduction to Grain Marketing: Video Series based on Bulletin E-3416.

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