As 2016 marches along, 2017 will loom large as a year of opportunity. There will be opportunities to market both old (2016) and new (2017) crops. Often I hear producers say, “When prices get to a certain level, I’ll sell.” What they’re referring to is a perceived value that would create an action on their part. When looking up at higher prices, the value proposition looms large and, if fulfilled, would create a level of happiness. Or would it? As prices rally, it is often difficult to follow through on those well-made plans as you rethink the most current news or reasons why prices are higher. Too often opportunity comes as anticipated, yet the original action plan changes. To help curb these changes as the market changes, we’ll look at two items to consider: value of your commodity and time of year.
Let’s explore the value proposition. The value proposition suggests that you set predetermined target points and stay disciplined in your behavior. That is, sell when the market hits these targets, regardless of the news in the market. Far too often, we’ve talked to producers who have had every intention of selling, and when prices get to a certain level, hold back because the news appears to have changed. As prices move upward, the news becomes friendlier, and consequently, the rationale for selling becomes less valid. This could be detrimental to good marketing. Our belief is that target points set in place and executed provide an acceptable value, as you determined at an earlier time.
Purchasing call options prior to a market rally and prior to cash sales is a risk. Yet, it is a risk you might want to consider taking. Call options are often a strong catalyst in providing the courage to sell at target points, knowing you already have crop re-owned.
The calendar approach, or time-of-year approach, is another variable to consider when marketing. Often the market moves higher in periods of great uncertainty. As mid- to late- winter approaches, the uncertainty with the year ahead is at its greatest. Information regarding the crop is totally unknown and only assumed or speculated. Typically, prices move higher, factoring these unknowns into higher prices. Therefore, if prices move upward without a singular driving force, it could likely be time of year. Be ready to reward this rally. This will take courage, yet if you wait to gather good information to make a decision, the market move is likely over.
Selling value, the calendar, or a combination of both will likely keep you from holding too much inventory and avoid selling when cash requirements are high and prices low. A balanced approach to marketing is paramount. If you are going to be aggressive at forward contracting, cover these sales with calls. If you desire a more conservative approach, purchase puts. Or, use a combination of forward sales, purchased calls, and purchased puts.
If you have questions or comments, or would like help in creating a balanced strategy for your operation, contact Bryan at Top Farmer Intelligence (800-TOP-FARM, ext. 129).
Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.