These are some of the questions that must be answered to determine what risk growers can take and which ones they need to pass on. Growers should be willing to develop marketing skills. Successful market planners are constantly learning new skills such as using market options or basis contracts. They take advantage of marketing professionals who help them find ways of dealing with market risk.

Developing an integrated marketing approach

Marketing decisions should be made based on their impact on long-term profitability not short term "windfalls". The impact of marketing decisions on production, finances, and human resources should be accounted for. Managing market risk begins with a marketing plan. This plan should be based on the goals of your business, the level of profit needed, and your ability to accept risk. The three keys to a successful marketing plan for grain are:
" An accurate account of production costs for a bushel of grain.
" An understanding of the appropriate marketing and risk management tools available.
" A decision plan.

Understanding Marketing Tools

Learning about the full range of price risk management tools will allow growers to become better marketers and risk managers. Selecting the right tool to use at the right time will not only reduce risk, it could increase profit. The following are a basic overview of the more commonly used strategies and when to use each. Consult your local marketing professional or extension marketing specialist for more information.

Storage (with no protection)
Storage is a way of avoiding seasonally low prices. When prices are below the level anticipated in the marketing plan, storage may be justified, assuming the grower has adequate financial resources and storage costs are covered.

Cash Sale
When prices are favorable and at levels anticipated in the marketing plan, a direct cash sale is warranted.

Deferred Payment Contracts
Deferred payment contracts allow for the current pricing and delivery of the crop, but can delay the receipt of payment. They are often used as an income management tool for tax planning purposes.

Fixed Price Contract for Deferred Delivery
This contract allows producers to establish a price for later delivery. A fixed price contract, also known as a cash forward contract, may allow a grower to schedule deliveries at times of the year that better fits with labor, grain quality, and logistics. These contracts often work well when crops are large, when storage is tight, or when the market price reaches the objective in your marketing plan.

Basis Contract
Basis is the difference between the local cash price and a futures contract price for the same date. Basis is typically more stable and predictable than either the underlying futures contract or the local cash price. However, basis does change in response to local supply and demand factors. A basis contract allows you to fix the basis, but allows the final cash selling price to be determined at a later date by subtracting the fixed basis from the futures price. This strategy works well when the basis is strong (cash prices are high relative to futures) and there is some potential for an increase in futures prices.

Deferred or Delayed Price Contract
A deferred or delayed price contract transfers title of a crop to the buyer at delivery, but allows the seller to set the price later. It is commonly used when storage is tight. At these times, the local elevator wants to move more grain into the marketing channel, but the seller may not be satisfied with current prices.

Minimum Price Contract
A minimum price contract establishes a floor price for the duration of the contract. The floor price is typically several cents below the cash price at the beginning of the contract. A producer could net less with a minimum price contract than with a fixed price contract if prices fall, but will benefit from a rise in market prices. This contract eliminates much downside price risk.

Short Futures Hedge
Selling futures contracts to protect the value of grain or livestock in inventory or the value of expected production is a short futures hedge. A short futures hedge reduces downside price risk. On the other hand, it also reduces the ability to capture upside price movements.

Developing a Decision Plan

STEP 1. Write down your marketing goals. Your goals should be simple, such as: "Make $0.20 over my cost of production." or "Increase profit by selling on a narrow basis at least three different times of the year." Make sure your goals are realistic and will result in an improvement in overall profit. For instance, a goal of selling at the market high is probably not realistic since you won't know when the high is until it is past.

STEP 2. Once you have a set of marketing goals you are ready to consider your options in light of corn prices and market forces. If you grow or own grain, you are in one of the following situations. These are:
" Sell now.
" Hedge for latter sale or to retain ownership of sold grain.
" Store (no hedge protection) for latter sale.
" Store (with hedge protection) for latter sale.
There are various alternatives to use within each of these categories (see market tools above), but these four basic options are always present.

STEP 3. With your marketing goals in mind, the first question that you should consider is to sell grain now or wait. For most producers this is the beginning and end of the process. Their lack of understanding of the marketing system puts the entire load of their marketing program on one big decision - to sell or not to sell. In an effective marketing plan, the decision to sell grain is only the beginning of the process. Your decision to execute a sale should be based on your risk attitude - can you afford to take a chance on price changes (up or down) while holding grain. Remember if you are holding grain without a hedge, you are assuming all risk.

Technical analysis
Technical analysis is your sell trigger. While the fundamentals and cycles show you the long-term patterns, technicals allow you to see the short-term trend. Technical analysis is based on trend charts or bar charts showing daily market high, low, and closing. By looking at the monthly and weekly record a corn marketer can see the market trend and learn to tell when it will change. Talk to your extension marketing specialist about learning to read bar charts.

Cost Analysis
Cost analysis helps you determine whether or not you can afford to be wrong. If you are a young farmer with high cash rent and large debt, you can't afford to turn down a small profit while taking a chance that the market will continue to climb. If you are wrong, you take the chance of losing the farm. On the other hand, if you have money to burn, then you can afford to take a chance.

Psychology
Emotion and common sense are usually dead opposites. Learn to put emotion aside and focus on common sense. Because most people let emotion dictate their decision process, it is often helpful to take the contrary opinion when compared to the rest of the crowd.

STEP 4. Once a decision has been made that prices warrant a consideration to sell grain, the next decision is whether to sell cash (or forward contract) or use the futures market. This decision can frequently be worth $0.25 or more. The key is to know the market basis for your area. Basis is the difference between Chicago futures and your local cash price. Your extension marketing specialist can tell you the "normal" basis for your area. When the basis is better than normal, the market is telling you it needs corn. In this situation, selling cash or using a basis contract is the best option. However, if the basis is weak, then the market is telling you it doesn't need the corn right now. In this case you should sell by using a futures contract or a contract that leaves the basis open.

STEP 5. The final decision is when to deliver the grain. This decision is based on the market signals such as the difference in futures prices between the nearby months and the long-term market. If the basis is weak and future months offer the opportunity to pay for storing the grain, then selling in the future is a good decision. However, if the price analysis indicates that the future months don't offer you enough to cover storage costs, then the nearby options are the best bet.

Conclusions

If you follow the process outlined above in developing a market plan and executing it, you may consistently realize a higher return on your investment in grain production.

In summary, keep the following points in mind:
" Know your ability to accept market risk.
" Know your production costs.
" Develop a marketing plan with specific goals.
" Develop a trading discipline.
" Don't gun for highs or lows, set a goal and stick to it.

This publication is available in alternative media on request.

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