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MK108 Understanding Ag Market Pricing Tools

Marketing Library

Traditional farmers …

• Spent most of their time and efforts on becoming efficient producers

• Marketing was often left to chance.• Grain was delivered at harvest and sold at

the day’s price.• Livestock was sold at

the offering price whenanimals were shippedto market.

USDA photo.

But today …

• Most farmers and ranchers realize that they can and should take some action to improve the prices they receive.

• Delivery to market and pricing do not need to happen at the same time.

• Marketing tools can control the time when selling prices are set.

Changes are affecting the markets …

• Government programs aim for more flexibility and more market freedom.

• Export markets are growing• Can be uncertain and fast-

changing• Demand may change from

year to year.USDA photo by Ken Hammond.

All this change is called “VOLATILITY.”

• Prices can swing sharply up and down.

• Wide swings in the market can be frightening if farmers lack knowledge.

• Or, market freedom can be profitable for farmers who have the market skills to take advantage of big market moves.

What is your market objective?

• Set selling prices when markets are high.

• Avoid setting prices when marketsare low.

• Doing this requires marketknowledge and market skills.

Marketing tools:

• Cash sale at delivery is risky. Harvesttime often has low prices.

• Forward contract sales can avoid pricing at harvesttime, but still may not offer the best price.

• Hedging with futures offsets sales or purchases to be made later in cash markets. Requires margin deposit.

• Hedging with options offers some price protection with no limits on the upside.

Marketing tools: Cash contract …

Advantages:• Exact price is known.• No margin money• Simple• Limited downside risk

Disadvantages:• Reduced flexibility• Must deliver at

contract price• Price usually below

futures price• Limited upside price

potential

Marketing tools: Using the futures market …

Advantages:• Selling price is known

with narrow range• Maximum flexibility• Competition

establishes price• Risk is transferred to

someone else

Disadvantages:• Requires knowledge• Requires margin

money• Requires difficult

decisions• Upside profit potential

is limited

Marketing tools: Using the options market …

Advantages:• Potential loss is

limited to premium• Competition

establishes price• Downside risk is

shifted to others• Upside profit potential

unlimited

Disadvantages:• Requires knowledge• Requires payment of

premium• Net price is reduced

by premium in uptrending market

• Requires difficult decisions

Some common contracts …

• Forward pricing before harvest• Price based on futures market• May call for later delivery

• Pricing after harvest• Holding unpriced grain can be risky.• If prices fall you must also pay storage costs.

• Deferred pricing contracts allow delivery to elevator but prices are set later.• Storage costs must be paid.• Elevator may go out of business.

Some common contracts (cont.) …

• Basis contracts fix basis but price is variable.• Producer typically receives 75 to 80% at

delivery.• Price is set at a later date.

• Minimum price contract offered by elevator• If prices rise, farmer does not benefit.

• Other types of cash grain contracts made by grain firms may vary by region.



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MK108 Understanding Ag Market Pricing Tools

Marketing Library