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Hedgucation 101:Eight Important Elements of An Ag Marketing Plan

Introduction

We’ve collected eight of our favorite articles for hedgers, farmers, merchandisers and producers - all in one place.

If you are a grain hedger, farmer, merchandiser, or producer, you’ll need to know how to protect your farm, your crops and your profits from market volatility. In this resource, we’ve curated a series of articles designed to help you create an ag marketing plan, learn about hedging strategies, margins, put options and more. 

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This resource is a collection of essential topics designed just for you.

  • Why a Structured Ag Marketing Plan is Crucial
  • Cost of Production for Grain Marketing
  • Hedging Your Crop with Futures vs. Options
  • Protecting Grain with Put Options
  • Grain ReOwnership Without Margin
  • An Alternative to Physical Grain Storage
  • How to Win at Grain Basis
  • The Truth About a Margin Call

Download all the resources on this page by filling out this form, or keep scrolling to read each one individually.

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Chapter 1

Why a Structured Ag Marketing Plan is Crucial

“I have a gut feeling that the market’s going to keep going higher, so I’m not going to do anything.”

I’ve heard that phrase countless times, and it always makes me cringe.  Don’t get me wrong, I’m all for optimism and keeping a positive outlook.  However, I’m very much against risking your livelihood on a ‘gut feeling.’ The key to successful marketing in these fast-moving markets is creating a structured plan for marketing bushels, and sticking to it.

This blog post not only explains WHY you need to create a structured ag marketing plan, but also how to make one yourself. Each plan is unique, of course, but with a little guidance and some helpful resources, you’ll be well on your way in no time.

Read the complete article Why a Structured Ag Marketing Plan is Crucial

"Some producers may be saying, “I’ve been doing my own thing without a plan for this long and it’s always worked out, so I’m not going to change.” If that’s the thought you have, then I’d ask you to take a serious look back at years past and ask yourself, “Did it really work out for me as well as it could have?”"

- Jake Swart

 

 

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Chapter 2

Cost of Production for Grain Marketing

One of the first questions I ask producers when I talk to them about making cash sales or putting on hedges is, “What is your cost of production?” Many have at least a general idea of what their cost of production is, but there are some who fumble around on the other end of the phone trying to fabricate a number because they don’t know it. Now look, I get it—maybe you have it calculated and written down somewhere for when you have to make marketing decisions, but you don’t have it memorized off the top of your head. That’s understandable. However, not knowing your cost of production—or making decisions without factoring it in—is not understandable. Without knowing that number, how would you determine when to sell for a profit or hedge to protect your break-even?

This article goes step by step through the cost of production formula, then gives a concrete example of how a particular farm in Iowa might get to the “golden number.” Using fixed costs, variable costs, and the number of bushels you produce, this article demonstrates how you can arrive at the cost of production, which should be the basis for making marketing decisions.

Read on to see how it’s done: Cost of Production for Grain Marketing

"Making marketing decisions without using your cost of production is like shooting in the dark and hoping you hit the target. Knowing this number can help you determine when making a cash sale makes sense, and when it might make more sense to use futures or options to hedge."

- Jake Swart

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Chapter 3

Hedging Your Crop with Futures vs. Options

It’s a debate as old as time: futures versus options. When does one use futures?  When does one use options? When does one use both at the same time? Well, maybe it’s not really much of a debate. And maybe its history doesn’t expand back all that far. Nonetheless, it’s a conundrum that I’m asked about on a fairly regular basis. The answer can’t be boiled down to always using one over the other, since it depends on the situation at hand. Some situations are cut and dried for using options, some situations are cut and dried for using futures, and some situations require a little bit of weighing pros and cons. Regardless, it’s a question that gets asked, so it’s certainly worth taking a deeper look.

Futures or options? It depends on the situation. This article provides concrete examples to demonstrate times when futures might be more advantageous and times when producers might lean toward options. Don’t leave it up to chance. Read on: Hedging Your Crop with Futures vs. Options

"Let’s say it’s harvest time. You pull the bushels out of the field, but don’t have anywhere to store them, so you have to sell. The price isn’t where you want it to be, so you want to have the potential to add onto your sales. You have two options: buy futures or buy calls. Which one should you choose? Well this is where weighing the pros and cons comes into play."

- Jake Swart

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Chapter 4

Protecting Grain with Put Options

Let me paint you a picture: Harvest is winding down and you’re pulling the last of the crop out of the field. The price you could get at the elevator is hovering right around that breakeven level, which is good, but you’re aiming to bring in a profit for the year. You have storage bins on farm, so you know you have a place to put the grain if you don’t sell it. After this year of turbulent prices, you’re going back and forth to decide whether you should sell and break even, or store the crop and hold off sales in hopes of a potential winter rally like we saw in February 2018.

What should you do? Sell and run the risk of staring down seller’s remorse if we catch a winter rally? Or store it and risk prices potentially breaking below your breakeven levels? How about an option that allows you to protect that price while still holding out for a potential rally?

Sound appealing? In this article, we break down the nuances of a “put” option, an effective way to protect your downside while your upside stays open. Read on to learn more about this option and what critical question you need to ask in order to determine if want to use it. Read more. Protecting Grain with Put Options

"You’re protecting your downside while leaving your upside open."

- Jake Swart

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Chapter 5

Grain Reownership Without Margin

When managed properly, margin can be a powerful tool for both hedgers and speculators. However, I know that some producers have been burned in the past by mismanaged margins and, as a result, have sworn off using margin for the rest of time. I definitely wouldn’t recommend going that route, but I want to make sure that producers who are a part of that camp know they can still use these tools without necessarily using margin, especially around the key time of year that is harvest.

With harvest time upon us, this blog is the perfect article to guide you through key decisions that need to be made this time of year. Read on.

"What’s your biggest worry when thinking about using futures and options? Based on the number of conversations I’ve had with producers, I’d be willing to venture a guess that the answer is getting a “margin call.”"

- Jake Swart

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Chapter 6

An Alternative to Physical Grain Storage

Harvest is fast approaching. As everyone is well aware, prices aren’t exactly at profitable levels for many, if any, producers. Everybody is holding out hope that prices will rally at some point between now and harvest to give producers the ability to market grain at profitable prices. Though we certainly want that to happen, you need to ask yourself the hard question anyway: What happens if prices stay depressed through harvest? What’s your plan for the physical grain when it comes off the combine, if that is the case?

We explain the options producers have, including on-farm storage, selling the grain off the combine, and his third option that allows you to avoid storage costs without limiting yourself to the current market price. Discover more about this third option, grain reownership.

"At the end of the day you have to ask yourself, do I want to take the risk of prices staying depressed for months to come and rack up large storage costs? Or do I want to bring in cash flow and avoid those costs, while still leaving my upside open and letting time work in my favor?"

- Jake Swart

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Chapter 7

How to Win at Grain Basis

Covered calls are a great way to slowly build earnings over time

When I say you should look to “win the basis game,” what’s the first thing that comes to mind? For many, I’m guessing the first thought is, “What in the world is the basis game?” You may already be familiar with the concept of grain basis, but thinking of it as a game is something I don’t think nearly enough people do. Most people think of basis as an unfortunate, uncontrollable part of selling your crop. The elevator, or whomever you deliver your bushels to, gets to set the basis, and there’s nothing you can do about it. At least, that’s what many producers think—but it’s simply not the case.

Check out this article to learn the basics of basis. You'll see some good examples of how to put covered calls into play and give you instructions on how to put it into your ag marketing plan. Ready to win at the basis game? Read on. 

"Grain basis: a game you play to win."

- Jake Swart

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Chapter 8

The Truth About a Margin Call

Don’t get me wrong—margin calls are certainly a possibility when using futures and options because of the leverage that’s offered by these contracts. However, when properly margined on the front end and properly monitored, margin calls can be controlled.

That’s how we explain the scary world of margin calls in this article. You'll learn just what a margin call is, how to fix the issue before it even occurs, and see a concrete example to show you how it’s done. It’s better to know your risks to be able to leverage them properly. Read more in this article.

"Maybe it’s not quite that dramatic, but to some, a fear of margin call can handicap them from ever wanting to come near The Board. And that’s a real shame because The Board of Trade offers many advantages to producers that they’ll never be able to utilize."

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