What’s the best way to sell commodities into a rising market? Two words – incremental sales. What’s the best way to sell into a falling market? Incremental sales.
Commodities analysts may have divergent opinions on the direction prices will take, but they are unusually unanimous about this strategy.
“In my experience, it works on any given commodity, in a bear market or in a bull market,” said John DePutter of Ag Alert in London, Ont. He writes for Wild
Oats and Broadwater marketing newsletters.
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The aim is for farmers to sell their crops in the top half of the market for that year so they beat the average price.
DePutter said this strategy helps minimize the price risk inherent to farming.
By selling each crop in four or five lots, farmers are able to even out cash flow and avoid paying for storage on much of their crop.
DePutter said relying on any outlook is risky because no one knows the ultimate outlook for any crop. Cal Kelly, a farmer and grain markets analyst from Regina, echoes that point.
“The way to play it safe is to sell in pieces,” he said.
Kelly said most producers tend to stop selling in rising markets. Not only do they end up missing the peak of the market, but they usually miss their target price twice – on the way up and on the way down.
The key is discipline. “Don’t get too excited and get greedy and hang on too long,” Kelly warned.
More astute marketers can fine tune each incremental sale according to signals like a narrow local basis, which indicates a premium in the local market or deals on freight.
Here’s an example from DePutter: Farmers who rely on credit and need to be more conservative may forward contract 20 percent when loans are being negotiated. Another 20 percent can be contracted in early summer when weather scares can drive prices up. Yet another 20 percent can be contracted once the crop can be safely delivered without serious yield or quality problems.
Farmers who are more risk tolerant, who have more storage and rely less on the banker, may want to schedule sales in 10-15 percent increments. Kelly said farmers who are worried about selling too early, and missing out on rising prices, can use options or futures to replace their sales.
Both analysts said it’s important recognize when the overall tone of the market changes.
“There’s nothing wrong with making a sale right after the peak,” said DePutter.
