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It\u2019s never too late to update your marketing plan for the new growing season.\u00a0 In this post, we will consider some possible marketing strategies for crops, along with some of the risks associated with these strategies.<\/p>\nIt\u2019s never too late to update your marketing plan for the new growing season.\u00a0 In this post, we will consider some possible marketing strategies for crops, along with some of the risks associated with these strategies.<\/p>\n
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I want to start by highlighting three potential risks associated with different marketing strategies.\u00a0 The first of these is price risk<\/em>, or the risk associated with uncertainty about future prices.\u00a0 There is always a chance that the price a producer receives is less than the price they planned to receive.<\/p>\n To mitigate price risk, some producers will enter into a contract to sell what they produce at an agreed upon price.\u00a0 While this strategy may reduce price risk, it exposes the producer to counterparty risk<\/em>.\u00a0 This is the risk that the other party to the contract will not meet their contractual obligations.\u00a0 Either the buyer does not take delivery of the commodity, or the seller does not deliver the commodity as promised.<\/p>\n Finally, marketing strategies that use futures or options contracts expose producers to basis risk<\/em>.\u00a0 In commodity markets, the basis is the difference between the local cash price and the nearby futures price.\u00a0 As the local cash price changes relative to the futures price, the basis changes as well.\u00a0 Basis risk is the risk associated with unexpected changes in a commodity\u2019s basis.\u00a0 For producers, this risk leads to losses when the cash price decreases relative to the nearby futures price.\u00a0 That is, when the basis weakens.<\/p>\n In general, different marketing strategies come with trade-offs between different forms of risk.\u00a0 For example, contracting to sell a crop reduces price risk but introduces counterparty risk, and possibly basis risk, to the marketing plan.\u00a0 With these risks and the potential for trade-offs in mind, let\u2019s look at marketing strategies.<\/p>\n The most straightforward approach to marketing a crop is to sell it in a local cash market at the prevailing market price. \u00a0The trade-off to its simplicity is its riskiness.\u00a0 Producers who choose this strategy are fully exposed to price risk and may not find the prevailing market price acceptable.\u00a0 This risk is made worse because prices for most crops tend to be lowest near harvest.\u00a0 Price risk can be lessened in this strategy if the crop can be stored for sale later when prices are higher.\u00a0 However, storage comes with costs and there is no guarantee that the price will increase enough to cover those costs.<\/p>\n Producers who wish to reduce price risk from their marketing plan might consider forward contracting.\u00a0 A forward contract is a legal agreement between a producer and a buyer.\u00a0 The producer agrees to deliver a specific quantity and quality of a commodity on a certain future date.\u00a0 The buyer agrees to take delivery of the commodity and to pay a specific price for it.<\/p>\n The advantage to contracting for the producer is the reduction of price risk; however, there are tradeoffs to consider.\u00a0 While price risk is low, contracts introduce counterparty risk to the marketing plan.\u00a0 There is also the risk that the producer\u2019s crop will not meet the quantity or quality specifications in the contract.<\/p>\n A third marketing strategy is to use futures contracts to hedge against price decreases.\u00a0 This strategy is implemented in three stages.\u00a0 First, the producer sells futures contracts for the crop they want to sell early in the growing season.\u00a0 Then, they buy futures contracts later in the season, close to harvest time.\u00a0 Finally, they sell the crop in the local cash market.\u00a0 Normally, price decreases over time lead to profits in the futures market that offset low cash price.\u00a0 The flip side is that price increases lead to losses in the futures market that count against income earned in the cash market.<\/p>\n Hedging using futures contracts reduces price risk by \u201clocking in\u201d a certain price; however, basis risk is an issue.\u00a0 If the basis is weaker than expected, the net price received by the producer will be less than the price they targeted with the hedge.\u00a0 Producers who consider this strategy must also consider the costs required to buy and sell futures contracts.\u00a0 These costs include brokerage fees and margin requirements (a deposit you make to enter the futures market).<\/p>\n As you develop your marketing plan for the coming year, consider all the options available to you.\u00a0 The purpose of a marketing plan is to help you identify an acceptable price and to reduce the risk of not receiving that price.\u00a0 Which strategy is best for risk management purposes may change from year-to-year as growing conditions and economic conditions change.\u00a0 Your ability to take on risk and your general attitudes concerning different types of risk are important as well.\u00a0 Choose a strategy that you are comfortable with and understand.\u00a0 If you want to learn more about these and other strategies to manage market risk, reach out to the extension economist in your district.\u00a0 We can help you understand how to implement different strategies in your operations and how to evaluate the costs and benefits of doing so.<\/p>\n","protected":false},"excerpt":{"rendered":"Potential Marketing Strategies<\/h3>\n
Cash Sale at Harvest<\/h5>\n
Forward Contracting<\/h5>\n
Hedging Using Futures Contracts<\/h5>\n
Choosing a Strategy<\/h3>\n