Posted on March, 28, 2025 at 09:59 am
This is the second instalment of a three-part series brought to you by Glacier FarmMedia’s MarketsFarm. The first appeared in the March 4 issue.
The title of this article borrows from Donald Trump’s book, The Art of the Deal. Given the current chaos he has stirred up, it seems fitting to reference him in a discussion on navigating uncertain markets.
Last week’s article in Grainews underscored the need for a solid grain marketing plan amid today’s market turbulence. From geopolitical uncertainty to shifting trade policies, including the threat of U.S. tariffs on Canadian grain, the marketing environment has never been more complex.
This week, we turn to the nuts and bolts of marketing: what options do you have? How do they work? And most importantly, how do they fit into an overall strategy that maximizes opportunity while managing risk?
Don’t fixate on the prices in this article. Prices vary over time and by region. Instead, focus on the concepts and marketing alternatives. Prices change, but farm marketers always have choices about how to construct a balanced plan.
Selling grain in the cash market is simple, giving it an inherent appeal. The farmer checks with various buyers and sells to the merchant with the right price and logistical attractiveness.
Pros:
• Immediate cash flow.
• No margin or storage costs.
• Protection against future price declines.
• Eliminates concerns about quality degradation in stored grain.
• Flexible — the sale size can be adjusted based on preferences and market conditions.
Cons:
• No ability to benefit from future price gains.
• If many other farmers are also selling, it is likely to result in a relatively weak cash price.
Example: A farmer sells feed barley at $5 per bushel (all figures in Canadian dollars except where noted). The farmer has locked in that price. Future price movements no longer matter. Whether this was an attractive price or not will only be known in hindsight.
A forward contract allows farmers to lock in a price for a portion of their crop. The deal is done today. The delivery date is in the future, as specified in the contract.
Pros:
• Provides certainty about revenue.
• Aids farm financial planning.
• Preferable to immediate sales if today’s prices are depressed due to short-term factors.
Cons:
• If prices rise significantly after locking in, farmers miss out on higher revenue.
• Subject to production risk. If the contracted volume is not met, penalties may apply.
• May require storing the grain until a delivery date in the future if it has been harvested.
• No flexibility once the contract is signed.
Example: A farmer contracts canola at $625 per tonne for delivery later, fearing a downturn due to a trade issue. If that threat materializes and prices fall to $600, the contract provides protection. However, if the trade issue is averted, and prices rise to $650, the farmer is committed to selling at $625.
Key point: The example above assumes a direct relationship between prices and the trade disruption. While this may seem logical, it is not assured. Many other factors are in play in a complex, open global market. Keep this in mind while reading these examples. In the real world, prices may not behave as expected.
The basis is the difference between local cash and futures prices. A basis contract allows a farmer to lock in the basis. The futures price will change.
Pros:
• The farmer benefits if futures prices improve.
• Secures attractive basis levels.
• Generates cash when the basis contract is signed, based on the terms in the contract.
Cons:
• Price is still uncertain until the futures component is set.
• If futures fall after the contract is signed, the final price falls too.
• Locks in delivery commitments without guaranteeing a final price.
• Farmers may be tempted to sign basis contracts hoping futures will turn higher. This can be fatal when futures prices are persistently weak during strong bear markets. Hope is a crucial element of the human psyche — but is not a business strategy.
Example: A farmer sees a canola basis of $50 under July futures and signs a basis contract. If futures rise, the farmer benefits. But if futures fall, the final price is lower than expected. The basis stays the same — it has been locked in.
For crops with established futures markets, hedging can provide flexibility while managing downside risk. By buying or selling futures contracts, farmers can address perceived opportunities or risks, while maintaining the ability to adjust positions.
Pros:
• Provides a way to hedge against price declines without committing to a physical sale.
• Positions can be adjusted as markets shift.
• If deferred futures are above nearby futures, traders say there is a “carry.” The farmer may be able to capture the carry to get a higher price.
• If a farmer expects higher prices but does not expect to have physical grain to benefit from the move, buying futures may be a way to participate.
Cons:
• Requires margin deposits, tying up capital.
• Futures markets can be volatile, requiring active management.
• Not available for all crops (e.g., crops like peas and lentils lack futures markets).
Example: A wheat grower sees July Minneapolis wheat futures at US$6 per bushel and sells futures to hedge. If the futures price drops to US$5, the hedge gains value, offsetting losses in the cash market. However, if prices rise to US$7, the hedge results in a loss, reducing the ultimate price received.
A “call option” gives the buyer the right, but not the obligation, to purchase an underlying commodity at a predetermined price within a specified time. Conversely, a “put option” gives the buyer the right to sell the asset at the strike price within a set period. A farmer may buy a call option if they expect the price to rise. A put option is a gamble that the price will fall.
When buying a call or put option, the buyer pays a premium for the right to exercise the option, regardless of whether they choose to do so.
The strike price is the predetermined price at which the buyer can buy (call option) or sell (put option) the underlying asset.
The expiration date is the date by which the option must be exercised, after which it becomes worthless.
Pros:
• Options can be used as a form of price insurance.
• More flexibility than forward contracts or futures hedging.
Cons:
• Premiums can be expensive, particularly as they rise with increased volatility or for a deferred expiration date.
• Requires knowledge of options markets. This can involve attending an options marketing course from a grain merchant or reading relevant material from a book or the internet.
• Only available for major crops, such as canola and wheat.
Example: A farmer storing canola is worried about a drop in canola prices before they sell it. They buy a put option with a strike price of $600 per tonne. If the market price falls to $550 per tonne by the expiration date, they have effectively locked in a floor price using the put option. The gain in the value of the put option should theoretically offset the losses in the cash market from the physical sale. This is a very simplistic example but illustrates how farmers can use options to manage risk while maintaining a degree of flexibility.
Given the volatility in today’s market — including unknowns surrounding U.S. tariffs — strive to be nimble. There are many tools available for farm marketing. Understand them all. Utilize the ones that fit your situation and current marketing conditions. Some crops, such as lentils or peas, lack futures markets, making strategies like forward contracts or timely incremental sales even more important.
Movements by the Canadian dollar add complexity. It recently collapsed to 68 U.S. cents against the U.S. dollar, matching the lows seen in 2016 and 2020. Although sentiment is extremely negative, history suggests a corrective rally could happen at any time. A weaker Canadian dollar supports the basis and cash prices, while a rebound could pressure basis levels.
As Leonard Mlodinow notes in his book The Drunkard’s Walk, humans tend to overestimate their ability to predict the future and resist changing course when things do not go as expected. This tendency can be costly in a volatile market. Rather than try to guess what’s ahead and assume a singular result, good farm marketers are educated about — and prepared for — a range of outcomes.
Legendary investor Warren Buffett said, “Risk comes from not knowing what you’re doing.” Farmers who understand and combine different marketing strategies can balance maximizing revenue and ensuring cash flow while limiting risk in uncertain times. Whether tariffs materialize or not, uncertainty is part of modern grain marketing. Developing and implementing a diversified marketing plan increases the chance of financial success. It can even increase the odds of getting a good night’s sleep.
Like a garden, a marketing plan should be nurtured so that it grows with your needs and evolves with the market. Next week’s edition of Grainews will feature an article focused on how to maintain your plan. We will also explain how to avoid getting off track — something all too easy when human emotion is involved.
Souurce: Grain News