Wide swings in crop prices since 2007 are creating challenges for farmers when developing and maintaining a marketing plan. Rapid price swings have occurred for short-term prices, such as variability within a trading session or within a week, as well as long-term changes, which are those across several months or marketing years.
The primary benefit of developing a marketing plan is formalizing a strategy that balances price expectations with managing cash flows, grain inventories, delivery schedules and income tax liabilities. The challenge is keeping the marketing plan current while economic and market conditions are rapidly changing.
One of the most difficult elements to assess when updating a marketing plan due to changing conditions is the probability (odds) that prices will increase versus the probability that prices will decrease. Everyone wants to time sales to hit the high of the year. Unfortunately, no one can predict the future accurately, so consistently selling at the top of the market is nearly impossible. The best that can be done is to understand the forces that are impacting the markets, stay in touch with the changing market conditions and assign subjective (personal) probabilities to future price movements.
The general rule is that if the odds are good that prices will fall and the odds are low that prices will increase, lock in a price now. However, if the odds are good that prices will increase and the odds are low that prices will fall, then price the crop later. Admittedly, this oversimplifies the process, but it does place the focus on assessing the significance of the forces moving the markets and helps remove some of the emotion from the decision-making process during times of high price volatility.
The first step in assessing market conditions and assigning subjective probabilities to price movements is to become familiar with the underlying supply and demand conditions for the crop under analysis. This becomes the base reference point for assessing the impact of changing conditions. One publicly available source of information is the U.S. Department of Agriculture's (USDA) World Agricultural Supply and Demand Estimates (WASDE) report. These supply and demand estimates are updated every month and provide estimates of total production, imports, exports, domestic use and ending stocks. Even though many private analysts often question the accuracy of the USDA estimates, these forecasts are followed very closely by market traders.
The key value to monitor is the estimated stocks/use ratio. This ratio represents the amount of grain that will be available just before next year's harvest relative to the estimated total use of the crop. Average market prices are higher when the stocks/use ratio is small. However, prices are also more volatile when the stocks/use ratio is small because a minor change in projected supplies and/or projected use can make a big difference in ending stocks. This also puts a lot of pressure on the assumptions that are used to prepare the forecasts.