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How to market in a margin-based world - Farm Progress Issue

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56 - March 2009
How to market in a margin-based world
Key Points
в– Wide price swings likely will remain with
us through 2009.
в– Changing input costs make grain
marketing decisions difficult.
в– Grain pricing and input contracts need
to be based on profit margins.
HE “rules of the game” — the parameters that define how the markets function — are changing with
increasing frequency, making pricing
decisions difficult at best. The “rules”
changed in 2006 when Wall Street began
courting Chicago’s La Salle Street, and
they changed again in late 2008 when
several of our nation’s most trusted
Wall Street institutions collapsed. Prices
that had risen to astronomical levels by
the summer of 2008 quickly collapsed in
fear and panic as investors speedily reclaimed what was left of their funds.
Much of that money should eventually return to the commodity markets,
but investors will be more intentional
in their decisions and quicker to exit on
the first sign of trouble, as long as economic uncertainty reigns on Wall Street.
That translates into continued volatility,
creating wide price swings that leave the
typical producer wondering if supplyand-demand principles will ever drive
the market again.
Prices will continue to be a function of
supply and demand over the long term,
but price movement also will continue
to be modified by the money flow from
Wall Street. That money flow first created a strong tailwind that took prices
well above levels justified by supply and
demand, but then it reversed to create
a strong headwind that pushed prices
below justifiable levels by the end of the
Unfortunately, those dynamics, created by wildly swinging investor emotions, likely will remain a driving force
through much of 2009 as well.
Focus on a profit margin
Marketing decisions are amplified by
similar swings in input costs. Anhydrous
ammonia fertilizer prices rose well
above $1,000 per ton in the Midwest last
summer, only to fall below $300 per ton
in a few select markets by December.
Other input costs rode a similar roller
coaster, or simply pushed to record
highs and remained there.
Commodity prices that once looked
profitable no longer covered the cost of
production. As such, these changing dynamics have altered the way marketing
must be approached. No longer can
one afford to merely lock in prices for
grain when they’re perceived as good,
nor contract for input costs before revenues are known on the other side of the
Today’s producer must examine both
sides simultaneously, looking for opportunities to lock in both input costs and
grain prices at the same time, when the
combination allows him or her to lock in
an acceptable profit margin.
Good records are essential
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Doing so requires strong recordkeeping
for the farm and an ability to grasp what
the numbers mean. It requires a business mentality based on profit margins,
rather than selling based on what is perceived as a good price or that high price
that would feed one’s ego at the coffee
The first place to start is with a good
set of records. The next step is to build
networks with grain buyers and input
suppliers, seeking those who will work
with you to write contracts simultaneously when grain prices and input costs
combined create profitable margins for
your farm’s equity growth.
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This feature was independently produced
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