Page 14—Keystone Farm Show Section 1, Lancaster Farming, Saturday, January 1, 2000
John Berry
Ag Marketing Agent,
Lehigh Co. PSU
Cooperative Extension
The Changing Nature of
Crop Marketing and Risk
Management
We've all heard references to
the evolutionary factors affecting
agriculture. Undoubtedly, these
factors will pose an increasing
challenge to successful risk
management at the individual
farm level Improved risk
management is an opportunity but
it is not a choice. However,
improving risk management is
just part of the solution
Everyone has heard that farming
is a way of life This statement
has allowed many people -
farmers, lenders, government, and
others, to look at and treat
agriculture differently from other
businesses We need to encourage
everyone to realize that farming
must be managed as a business, or
it cannot be a way of life.
The message is to really zero
in on all elements of the business,
including accounting systems,
capital structure, production
management, and inventory
control Experience has shown
that it will be very difficult to
help better manage marketing and
other risks, if management control
around these other issues is not
integrated and already in place
Axioms and Objectives
Let’s share a few axioms that
are key to successful farm
business and crop risk
management:
1) A crop marketing program
will not be successful in the long
term if built solely upon
emotional decision making, or
speculative price forecasting.
2) A long-term successful
marketing program must be based
upon financially-informed,
balanced, and objective decision
making
3) Objectives of a successful
marketing strategy should seek to
obtain marketing balance, where
profitability assurance,
catastrophic loss insulation and
upside opportunity are provided
Moving toward accepting
these concepts is the first, and,
perhaps most difficult part of crop
marketing This is because they
usually imply significant change,
and sometimes move to doing
something that is not comfortable.
Competitive advantage is gamed
through education, information,
analysis, and gradual introduction
of concepts and tools involving
the risk management issues, this
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process involves an investment in
time, and a commitment to
improve,
This is not simple. Luckily,
Uncle Sam tries to fill the void
with acreage controls, deficiency
payments, and disaster relief.
Also, until recently, the tools
were too complicated, or too
expensive to provide practical
access to profit protection,
catastrophe avoidance, and upside
opportunity.
To make a point about any real
and practical ability to predict
price, let's look at historical corn
and bean charts.
What do these charts tell us?
1. No repeating pattern of
timing of highs or lows.
2. No pattern of degree of
highs or lows.
3. No new plateau.
4. Lots of volatility and
uncertainty.
None of these characteristics
are needed in objective business
management.
You can extract only a few
general insights from these charts,
which speaks to the folly of
building a marketing program
based solely on price prediction
and/or speculative decision
making.
I Try not to sell corn under
$2.40, or beans under $5.50.
2. Get costs of production
under $2.40 and $5.50,
respectively.
3. Get objective about pricing
decisions.
4. Use some means to assure,
and insure revenue, as the market
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5. Usually the market provides
an opportunity to lock m
profitable values at some time
during the marketing cycle.
Unfortunately, there are many
out there who wish to convince
the farmer that speculative price
prediction is marketing. This has
led many farmers into the bait and
switch cycle of marketing
management.
Traditionally, if you chose to
price m an attempt to lock in
profit, you had very limited
flexibility and no opportunity for
gam in a rising market. Worse, if
you priced, and had production
problems, suffering was likely
doubled, potentially leading to
catastrophic loss. This lead to the
two primal fears of crop
marketing - fear of lack of
production and fear of higher
prices.
Marketing Strategies
Luckily, just as much of the
direct help from the government
is going away, marketing tools
and strategies are evolving to
where the producer has a chance
at marketing balance. Tools exist
today that offer a reasonable
means to lock in profit, insulation
from catastrophic loss, and an
upside opportunity.
Here are two techniques that
producers might use to better
manage certain risks, but when
combined, can come very close to
achieving our objective of
balanced marketing
1
The simple minimum
price cash (MPC) grain
contract. In its simplest
form, in exchange for the
delivery of bushels, the
buyer guarantees to pay
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the farmer a minimum
cash price, with upside
price opportunity related
to the movement of the
underlying commodity
futures price. If the
underlying futures price
subsequently rallies, the
producer has the right to
reprice at the higher level.
An additional benefit that
is real, but less tangible, is
the time provided by this
strategy. This time gives
the producer the
opportunity to maintain
price flexibility while crop
and market conditions
become more clear.
Perhaps this will allow for
earlier pricing decisions at
more favorable values.
One other very important thing
the MFC strategy provides is
marketing courage. This will help
overcome the reluctance to sell,
avoid missed opportunity, and
overcome the primal marketing
fears. You may not find many
producers who will confirm this,
but a study of price history and
actual producer sales confirms
that more dollars have been lost
by not pricing when favorable
values were offered, than by
pricing, followed by crop losses
or a further price rally (e.g.,
realization of the primal fears).
The problem with the MFC
strategy is that it functions only as
a price insurance concept. It does
not insure against a production
risk, or thus, farm revenue.
Limited production at a great
price still equals limited revenue.
Therefore, from an overall
business perspective, we still
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