Recently, I have been having conversations with farmers around commodity marketing, which has brought to light different marketing strategies. One conversation might dive deep into price targets, futures, or options, while the next might include deciding what to do with grain still in the bin from the previous year.

Grain marketing can feel overwhelming; between futures, options, basis, and much more, there's a lot to keep straight. Every time I sit in on one of these conversations, I'm reminded how complex it can be to know when and how to sell. But no matter how different the approach is, one thing stays the same: understanding your cost of production is the foundation of every sound management decision. Did you really expect me to say anything different?

Without clarity, it's easy to get stuck in the mindset of waiting for the "perfect conditions". There is a lot of uncertainty in today's markets - weather, global demand shifts, and rising input costs all play a part. Outlooks currently hint at stability, but as we know in this industry, it's never guaranteed. Knowing the cost of production allows you to figure out what price you need to, at minimum, break-even (but ideally make $$$), and will give you confidence to make timely marketing decisions.

Marketing Options:

Before we jump into marketing options, let's review what some general terms mean in commodity marketing.

Basis: Basis is the difference between the current cash price and futures price with the nearest expiration date. The difference between cash and futures prices are often a negative value and based on conditions locally (transportation, storage, interest).

• Basis = Futures Price - Cash Price

Futures Price: The price agreed upon in a futures contract is a futures price, which can be thought of as the world price. It is set by the world supply and demand.  

Cash Price: Local price is referred to as the cash price, which is the value agreed upon for immediate delivery, or for accepting the current price for grain delivered earlier but not sold.

• Cash Price = Futures Price + Basis

Pricing decision tools can help mitigate the risks of unfavorable prices. Utilizing multiple tools may help provide the best protection against risk.

Storing Unpriced Grain: While not classified as a tool, it's a decision often made to store grain until a later date. Often, this decision comes with an expectation of market prices becoming more favorable in the coming months. It also provides an opportunity to capitalize on cash market prices but provides no protection against the risk of futures prices dropping or basis weakening.

Contracts: Contracts can be broken down into forward, futures, minimum price, basis and hedge-to-arrive contracts.

Forward contracts establish a set cash market price for your grain at a future date. It's an agreement to deliver a specific quantity of the grain for a specific price. It has room for negotiation on contract size, as there is no standardized amount that needs to be delivered. It locks in both futures and basis simultaneously to establish the cash price. This can be a good tool for those with limited on-farm storage or for those who wish to lock in cash prices ahead of harvest.

Futures contracts provide the opportunity to sell or deliver a standardized amount of grain during a particular month for a specified price. This contract is traded on the futures exchange market, typically the Chicago Mercantile Exchange (CME). For corn, soybean, and wheat, the number of bushels to be sold or delivered is 5,000 bushels per contract. An initial margin is the amount that needs to be deposited to establish the contract. A maintenance margin is the minimum amount of money that needs to remain available to cover any losses if prices fall, to ensure the contract can be fulfilled. A margin call is when the value of the account falls below the maintenance margin level. This contract requires upfront cash to maintain margin levels.

Minimum price contracts establish a minimum sale price. You are guaranteed either the current cash price or the minimum sale price, whichever is greater. This contract establishes a price floor.

Basis contracts are when the basis price is locked in instead of the futures price. At a later date, the futures price will be established, but the risk is run the price may not improve.

A Hedge-To-Arrive contract is a cash contract that allows you to lock in the futures price for the delivered quantity. Basis is set at a later date, and it can be helpful with a volatile market. With this contract, you as the farmer do not have to handle the margin call.

Put or Call Options: Options provide the right, but not the obligation to buy or sell a futures contract. A put option provides the opportunity to sell on the futures market; a call option provides the opportunity to buy a futures contract. When buying or selling, there's predetermined price levels called strike prices, which are the entry point into the futures market regardless of current futures prices.

Hedging: Hedging is taking equal but opposite positions regarding cash and future markets. It helps to offset the risk that exists in the opposite market. You start out already having taken a position in the cash market by producing your crop, with the opposite position being to sell on the futures market.

Costs:

One of the strategies for your grain can be to store it in your bin unpriced. While that decision is up to you, it's important to remember that keeping grain in your bins still has associated costs, and requires you considering your ROI, just as you do for seed and fertilizer. Maximum storage income results from selective rather than continuous use of storage. Let's break down the costs of storing grain.

• Storage Facility Cost: The ownership costs (depreciation, ROI, maintenance, insurance, etc.) of on-farm storage facilities may not play directly into the decision to store year-to-year, as those costs will be accrued regardless. BUT, if you are in a situation where you are storing grain on farm, while also renting out additional space because of unsold grain, consider those costs. Compare what it costs you to maintain your storage, and also what renting it costs.
• Interest: If you have a loan, it can be repaid with proceeds from the sale of grain. If it's stored, and the loan not repaid, that's an expense that's accruing. Even if no money is borrowed, there is an interest cost, as the proceeds could be invested into the business to earn an interest return.
• Handling: Consider extra drying, shrinkage, quality deterioration, and aeration costs that are associated with storage. There are fuel and power costs associated with drying grain down to a level that allows for long-term storage. Every time we store anything for a period, we have to assume some loss will occur because of shrinkage or quality issues.
• Opportunity Cost: What could you do with the money that the grain in the bin represents? Is that a tradeoff your willing to accept?

All this information, and yet we've only covered storage costs. Now to the fun part, cost of production! Calculating your cost of production requires strong record keeping, but it will pay dividends. Without understanding this value, you are guessing at what price you need to make money. What are all the things you need to produce a grain crop? Off the top of my head, I can list out: fuel, fertilizer, pesticides, seed, equipment (and its associated costs of payments, depreciation, maintenance), labor, and land ownership (rent, taxes, etc.). Calculate out what your fixed and variable costs are to grow your crops and break them down over your general yield data to gain an understanding of your break-even price.

There's relief in seeing the grain tucked safely in the bin, but the work isn't finished. Grain management doesn't end at harvest, as those bushels represent months of planning, inputs, and risk. Marketing should be included in this process, and not something that waits until the grain is in storage. Thinking ahead about your costs, storage, and sales strategy throughout the season keeps those bushels working for you. Once the grain is in the bin, it's easy to close the door and move on, but looking past the bin door is where good marketing, and profit, begin.

There's no single right way to market grain. Every farm has different goals, cash flow needs, and comfortability with risk. The best plan is the one that fits your operation and helps make decisions with confidence. It's worth remembering that waiting for the "perfect price" can leave good opportunities on the table.

Resources:

https://www.extension.iastate.edu/agdm/crops/html/a2-33.html "Cost of Storing Grain" https://www.canr.msu.edu/farm_management/uploads/files/E3416_Intro_Grain_Mkt_AA.pdf "Introduction to Grain Marketing"