Forward Contracting Leads to Long-term Success

The forward contract is a great tool because they know exactly priced with the final price and when to deliver it.

A Handbook for Ranch ManagersThe downside of forward contracting (vs using futures and/or options) are things like drought, disease, fire, flood, pestilence, etc–i.e. anything that might cause a crop failure and impact your ability to fulfill the quantity terms of the contract.

Planned Grazing: A Study Guide and Reference Manual  You would simply have to go on the market and acquire the amount of product you promised to deliver–and likely at a very exorbitant price. — jtl 

From AgWeb.com

Forward Contracting Leads to Long-term Success

Environmental & Natural Resource Economics: The Austrian ViewProduction agriculture is a constant game of unknowns. From fierce weather, to vigorous commodity prices, no year is the same. But experts say the beauty of marketing is eliminating one of the unknowns.

Reconnaissance Marine MCI 03.32f: Marine Corps Institute The Betrayed: On Warriors, Cowboys and Other Misfits Combat Shooter's Handbook “It’s one of the best tools to use when farmers are getting going with their cash marketing,” explains Naomi Blohm with Stewart-Peterson. The forward contract is a great tool because they know exactly priced with the final price and when to deliver it.”

The Essence of Liberty: Volume I: Liberty and History: The Rise and Fall of the Noble Experiment with Constitutionally Limited Government (Liberty and ... Limited Government) (Volume 1)  The Essence of Liberty: Volume II: The Economics of Liberty (Volume 2) The Essence of Liberty: Volume III: A Universal Philosophy of Political Economy (Liberty: A Universal Political Ethic) (Volume 3)“Whether they like the price, or it happens to be a year when prices are projected to be down and it hits breakeven or above, and there’s an opportunity to lock in a profit, that’s the primary function of a forward contract,” says ProFarmer Editor Brian Grete.

In a year like 2015, bleak prices mean farmers see less incentive in forward contracting. Considering the peaks and valleys of farming, however, sometimes you’ll need to sell the crop at a loss.

“I think the number one thing is do some pricing,” says Shawn Smeins of Rabo AgriFinance. “You can get paralyzed based off where our prices are today. You’re going to have to lock in sometimes at a loss and this is one of those times.”

“It’s not nearly as fun or as enjoyable as when you’re selling at really high prices and there’s automatically a profit, but it’s what’s required in these type of years,” says Grete.

That’s why Smeins’ advice is simple. “I think the biggest thing is have a plan,” he says.  “I can’t stress that enough. Studies have shown if you have it written plan, you’re going to carry it through.”

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He says there isn’t one magic plan that works for everyone.

“My personal opinion is if you have a cash-rent model versus an owned-land model, you have different fixed cost measures. Maybe you can take a little bit more risk in the market,” says Smeins. “My general opinion is farmers aren’t aggressive enough with the forward contracting. They sit back and wait, having more of an optimistic view of where the market is going.”

But that doesn’t always happen.

“Conditions change, fundamentals change, market situation is changing,  and you have to be flexible within that,” says Grete. “So, while you have a plan in place that has a strategy of selling at a profitable level, when you get to those prices, I think you need be somewhat fluid through that process and adapt as market conditions form.”

Grete says a good rule of thumb for forward contracting is to set sell targets.

“At ProFarmer we look to forward contract anywhere from a quarter to a third of the crop by the time planting season gets rolling,” says Grete. “Then, we look forward to pollination period for corn crop, for pod fill and pod set period for soybeans, and look to be anywhere from a third to 50 percent sold. And i think after that point in time, until harvest, then you can probably get up to your insurance coverage level.”

Grete says if you can market grain in the top 25%  to 30%, that will help ensure you’re in business for the long haul.  “Don’t try to hit the absolute high, because when you swing for the fence, you may hit some home runs, but you’re likely to strike out as well,” he says.

To help hit the singles, doubles and triples, Smeins suggests looking at the various marketing tools available today that can help craft a solid marketing plan.  Those may include “commodity derivatives, where it takes the margin risk off,” he says. “At Rabo AgriFinance, we do a lot of things with commodity derivatives that really helps a farmer with his cash flow.”

“A lot of guys are telling us they don’t have the ability to handle margin calls right now, their lines of credit are just thin and tight, so the best one is just buying a put straight out,” suggests Blohm. “You have a nice floor if the market rallies, and you can have full opportunity for upside.”

“Also, look at crop insurance as a tool,” says Smeins. “If (farmers are) carrying price loss coverage on their crop insurance, they can feel comfortable to market up to that level…. You can go home at night and sleep knowing you don’t have the production risk: You got it covered by insurance, you know what the facts are with the cost of your operation and you can feel comfortable with that marketing plan.”

Whatever tool you choose, make sure it’s based on your margins, not the unknowns. “Leave the emotions out, stick to the numbers,” Smeins says.

And even then, Blohm reminds producers marketing isn’t a once-a-year event. “The last frontier is always marketing. It’s the one that people seem to not care for the most,” she says. “So, that’s the one you have to develop the discipline, which also means making time for it every day, and also taking time to learn about the markets.”

A Handbook for Ranch ManagersA Handbook for Ranch Managers.  In keeping with the “holistic” idea that the land, the livestock, the people and the money should be viewed as a single integrated whole: Part I deals with the management of the natural resources. Part II covers livestock production and Part III deals with the people and the money. Not only would this book make an excellent basic text for a university program in Ranch Management, no professional ranch manager’s reference bookshelf should be without it. It is a comprehensive reference manual for managing the working ranch. The information in the appendices and extensive bibliography alone is worth the price of the book.

You might also be interested in the supplement to this Handbook: Planned Grazing: A Study Guide and Reference Manual.

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About Land & Livestock Interntional, Inc.

Land and Livestock International, Inc. is a leading agribusiness management firm providing a complete line of services to the range livestock industry. We believe that private property is the foundation of America. Private property and free markets go hand in hand—without property there is no freedom. We also believe that free markets, not government intervention, hold the key to natural resource conservation and environmental preservation. No government bureaucrat can (or will) understand and treat the land with as much respect as its owner. The bureaucrat simply does not have the same motives as does the owner of a capital interest in the property. Our specialty is the working livestock ranch simply because there are so many very good reasons for owning such a property. We provide educational, management and consulting services with a focus on ecologically and financially sustainable land management that will enhance natural processes (water and mineral cycles, energy flow and community dynamics) while enhancing profits and steadily building wealth.
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