Signals to Sharpen Your Commodity Marketing
Make Decisions that Sharpen Your Marketing Strategies: To make the most of selling decisions, you have to be able to measure your decision. Here's a run-down of eight (8) possible marketing scenarios you are exposed to. Will highlight grain in these examples, but any commodity tied to a futures market tells a marketing story.
Situation #1 Crop stored in the bin, outlook bullish, local basis narrow Time to lock the basis. Sign a basis contract. If you need cash right away, sell the grain and buy back futures or buy a call option. You can work with a commodity broker or a cash grain contract in this situation.
Situation #2 Crop stored in the bin, outlook bullish, local basis wide Time to make those grain bins earn a storage return. Remember a wide basis signals buyers are disinterested. A wide basis is a storage signal. If you need cash, a deferred pricing contract injects cashflow. But weigh the disadvantage of fixing a wide basis for the sake of receiving a cash injection.
Situation #3 Crop stored in the bin, outlook bearish, local basis narrow Deliver and price. This is your flat price signal. If you are fearful of a market fall or simply wish to take a profit while buyers are begging for grain (narrow basis), flat price now. Go directly to the bank.
Situation #4 Crop stored in the bin, outlook bearish, local basis wide This is your classic ‘storage hedge’ signal. If prices appear to be topping but the grain buyer is showing lack of interest by widening the basis, sell the futures only or buy a put option. Do not flat price when the basis is wide. By selling the futures or buying a put, you can protect against a futures price fall. Then wait on the basis to again improve (narrow) An excellent harvest time strategy.
Situation #5 Crop not harvested, outlook bullish, local basis narrow Time to sign a basis contract for fall delivery. Either this market is threatened by potential shrinking new crop supplies or end-user demand is exceptional. Symptoms include rising futures and desperate buyers. Another strategy is sign a deferred delivery contract and buy new crop call options as replacement.
Situation #6 Crop not harvested, outlook bullish, local basis wide Do nothing. A "padlock the bin and store it" signal. No sense locking the basis or fixing the futures in this scenario. If you are growing specialty crops or fear that commercial storage space may be scarce come fall, consider signing a production contract. Production contracts may allow you to go to the front of the line to deliver grain.
Situation #7 Crop not harvested, outlook bearish, local basis narrow Finally you get the green light to sign a deferred delivery contract (DDC). Considering how popular DDC contracts are, it is interesting there is only one market situation out of eight that justifies it. Futures prices are high and companies are anxious to buy your grain (as reflected by the narrow basis).
Situation #8 Crop not harvested, outlook bearish, local basis wide Go to your broker and sell the futures (hedge), sign a cash hedge contract (open basis contract) or buy a put option. The market looks vulnerable. Prices may slip lower and buyers aren’t returning your phone call.
For any commodity in the world attached to a futures market, the combination of price outlook and basis (price spread between futures and cash market) tells a story offering powerful marketing signals for grain, livestock, metal and energy producers. Stay tuned to Errol’s Commodity Wire, Calgary Good marketing . . . .