Let’s make a marketing plan, Part 1 The goal is to sell wheat for a price that makes growers a profit

The articles that I’ve been writing this past year have all been leading up to this one — making a marketing plan (broken into two parts). I’ve covered the basic principles and some of the marketing tools that you need to understand and know how to use. The first thing we should do is establish a goal for our marketing plan. It’s unstated, but we want to sell our wheat at a price where we make a profit, and to do that, we need to sell at a good price, which becomes our goal. A good price is different for each party in the market. For many absentee landlords, it’s the price shortly after weights and grades are completed for the crop. For you, the wheat producer, a good price is one that covers your costs of production and provides a profit. But the market doesn’t care if you make a profit. Supply and demand factors will interact, and they will determine the price. A good price for me is a price that is in the top third of the market range for that year. We’re not trying to hit home runs, but make hits and get runners on base!

There is no one right way to make a marketing plan. Over the years, I have attended meetings where different strategies were presented and used to make a marketing plan. One strategy recommends that you market percentages of your crop during the four growing seasons: preplant, growing, harvest, and storage. This strategy often had growers marketing wheat during periods when the prices were at lows in the market, which lowers your average marketing price.

Another recommended strategy is that growers market when wheat prices are above their cost of production. This is a sound strategy in principle, but there are issues in implementation of this approach. First, you need to accurately calculate your cost of production. This becomes a tough calculation, especially if you are growing several different crops. Expenses directly associated with a crop are easy to determine, but allocation of overhead expenses is more difficult. Any mistakes in this calculation could mislead you into marketing your crop at the wrong time. In addition, if prices are below your cost of production, do you wait for higher prices? Maybe you need money to meet cash flow needs. If you market below your cost of production, the next sale needs to be made at your cost of production plus the loss realized from your previous sale, or you reduce working capital, which is a problem. 

The following plan utilizes a marketing philosophy that I have developed over the past 50 years based on my farming and work experiences. My approach is to try to market our crop in the top third of the marketing range each year. This approach is not perfect either, especially since you have no idea when to expect the top third of the market to occur. To anticipate when we may expect this goal to occur, we use analytics — how the market responded in past years given similar circumstances. Analytics gives us a probability that the market will react similarly to events that occurred in the past under similar conditions. To keep a perspective on this, I like to look at the probability that an event will not occur. If the probability that an event will occur is 80%, then the probability that it won’t occur is 1 out of every 5 events.

There are four parts in a marketing plan: projection of bushels to market (this year and next year), market outlook, market strategy based on market outlook, and implementation of the marketing strategy. 

Crop insurance needs to be included as a part of this plan, but it doesn’t replace having a market plan. There are several different forms of crop insurance, but the most common type is revenue coverage. It combines the proven yield for a unit (this may be a single field or several fields put together) with a price guarantee. The price guarantee is the higher of the projected price (determined in the fall prior to harvest) or the harvest price (determined in August of the crop year). The projected price is calculated by adding a basis to the CBOT September futures close starting in the middle of August and finishing in the middle of September. The harvest price is the Portland cash price for August as reported by the Portland Merchants Exchange. Growers can choose different levels of guaranteed revenue (proven yield times projected price) up to 90%. Different insurance premiums are associated with each level of coverage.

The first step is a projection of the quantity of bushels of wheat to market, and we’re going to calculate this for our current year and also project bushels of production for next year. The best way to do this is to build a spreadsheet listing all your fields with their acreage and the crop that will be grown in each field each year, including summer fallow. You will also need to include the crop share for each field. 

Next, we estimate yields. There will be three yields: a projected yield, a crop insurance projected yield, and the actual yield determined after harvest. I am going to use my farm in Lincoln County as an example in our discussion so I can use real numbers. My first projection is made in the fall after planting. I use a yield that I feel is reasonable given my farm’s past history. I may update my projection at any time if I feel that weather conditions or something else has impacted yields. I compare my yield forecast to my actual production history (APH) calculated for crop insurance coverage. I have two production units, and the APH is slightly different because the fields were in wheat production different years. We need to do this for both winter and spring wheat fields. I have two fields that were planted this fall, one is winter wheat and the other is winter canola, and we are currently not planning to plant any spring wheat on my farm. The winter wheat field is probably my best field and has APH yields ranging from 51 to 99, and a 10 year average of 76 bushels per acre. I am going to use a 70 bushels per acre yield for my preharvest estimate until we get through the winter and get enough soil moisture to support a higher yield. 

For crop insurance, different levels of coverage can be selected, and your choice is usually determined by the insurance premium that will be charged. I choose the 85% level, which gives me the desired balance between cost and coverage. The APH is multiplied by the level of coverage that was selected, giving us an insurance yield guarantee of 64.7 bushels per acre. The projected price last fall was $6.94 per bushel, and the premium was $19.81 per acre, I paid $.306 per bushel to protect that 64.7 bushels per acre at the $6.94 per bushel level. This looks similar to buying a Put option with a Strike Price of $6.94 per bushel (this is a type of option that I haven’t explained, but it protects you from lower prices).

We now calculate the bushels we have to market by multiplying the acres in production by our projected yields and the crop share. The crop insurance marketing estimate will not change, but our marketing estimate will change if we change our yield estimate. After harvest, we’ll again update our production when we know our actual yields and calculate our final total bushels to market. It’s going to take some work and time to put this information together, but once you’ve completed the spreadsheet, you can use it for following years. 

We’re going to need to pause here in our marketing plan discussion, and the completion of this article will continue in the March edition of Wheat Life.  

The information in this article should not be considered a solicitation. Past performance, whether actual or indicated by simulated historical tests of strategies may not be indicative of future results. Trading advice reflects good faith judgment at a specific point in time and is subject to change without notice. There is no guarantee that the advice given will result in profitable trades. Any strategy that involves trading futures or option contracts can involve losses that may be substantial and not suitable for everyone. Each person should carefully consider if trading futures is appropriate because of your financial condition.

Howard Nelson is a retired agronomist and commodity broker. He worked for 31 years in the PNW grain industry and retired in 2020 from HighLine Grain Growers. He has a bachelor’s degree in agronomy from Washington State University and currently lives in Kennewick, Wash., with his wife, Cheryl. Nelson can be contacted at howardnelson73@gmail.com.