It’s easy to say, “you can’t go broke locking in a profit.”
The line has a charming simplicity and seems a truism that can’t be challenged.
But the reality for most grain farmers is that there’s no one easy way to lock in a profit unless that farm grows only one crop and it happens to be profitable that year.
The more challenging reality is that grain farmers generally grow some crops that make a little bit more than the cost of production, produce a couple that fall below the cost of production, and they pray that one of their crops will deliver a windfall.
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How does a farmer ensure that, over time, he locks in enough profit on his few winner crops to make up for losses on his losers?
“It’s more of an art than a science,” said Winnipeg adviser Mike Jubinville, admitting there is no easy answer for overall farm profitability, no rule-of-thumb that can be applied to the basket of crops that most farmers grow.
He thinks farmers need to judge each crop separately and make decisions about prices based solely on each crop’s individual outlook. He thinks farmers should not compare the profits on one commodity to the losses on another, because they are different markets.
John Duvenaud, who edits the Wild Oats Grain Market Advisory, agreed there are no easy answers, but said farmers should not sell out too fast on the one or two winners because it can be disastrous for long-term profitability. Farmers need to ensure that their good crops, over the course of a few years, make up for the bad-returning crops.
“If every time your crop pencils out a profit you sell it all, maybe you made money on that particular crop, but what a farmer has to do is sell some crops for real good money,” said Duvenaud.
“If they’re always cashing in as soon as there’s a nickel profit, they don’t stay in the game very long.”
Advisers say an even bigger problem is farmers selling too late, at a loss after the market has peaked, and profits are a memory.
Generally advisers spend their time preaching against most farmers’ penchant to not sell soon enough once profitability appears in the market. Many farmers won’t sell anything when prices are going up, advisers say, and they dally until the market crashes and they’re forced to sell.
But for those risk-conscious producers who hate losing the chance to lock in a profit, but who also don’t want to lose the chance for a windfall, advisers have two recommendations:
- Scale-in selling: Once prices are above break even, farmers should begin selling increments of their crop. That applies before, during and after seeding the crop. That way some profits are realized on some of the crop while the rest is left to sell on further rallies or price breakouts that can’t be easily foreseen.
- Always leave some way to catch the upside: That can mean leaving a portion of the crop in the bin until near the end of the crop year, or using a partial replacement strategy after selling in the cash market in order to catch an unexpected rally.
But before making sales decisions, farmers must know what price they need to make a profit. In other words, they need to know their costs of production.
Lee Melvill of Alberta Agriculture said many producers still haven’t worked out that vital information for each crop they grow.
“Way too many of our producers don’t know what their breakeven is,” said Melvill.
This lack of knowledge forces the farmer to be a gambler, because he begins to believe he needs very high prices to guarantee a profit.
“They don’t know so they keep trying to pick the peak of the market,” he said.
“They wait and wait and wait to pick the peak of the market.”
Melvill recommends farmers calculate three price levels: the survival price, which is cash costs only; an acceptable price, which is a breakeven price plus some family living costs; and a favourable price, which is anything over breakeven costs and family living expenses.
That way farmers can easily determine a profitable bid without guessing and can avoid the dangers of waiting too long.
Duvenaud usually recommends keeping a small amount of crop in the bin until the end of the year, because even if the market doesn’t look good, there is always a chance for something to happen. That unforeseen event can be the difference between surviving and failing as a farm.
“There rarely is any sort of obvious sign that something dramatic is about to happen,” said Duvenaud.
“Every once in a while you get a runaway bull market and those are just a godsend for farmers selling into them and you make a pile of money, but you have to make a pile of money (on those rare winners) to keep in the business.”
