Diversification key for profitable grain marketing
Diversification has long been a buzzwork of financial markets, used often to express the benefits that result from allocating capital toward a large and varied pool of investments. It also is a term used often by good agricultural risk managers wishing to encourage producers to employ the practice within their grain marketing plans.
With diversification comes a basic rule: having more options is better. Diversification mitigates risks that are otherwise present when financial returns depend on a limited scope of investment options, which fits with the saying, “Don’t put all your eggs in one basket.”
Diversification on the farm can entail everything from the types of crops gown to the contracts used to make crop sales. The Sustainable Agriculture Research and Education organization recognizes diversification of crop plantings as a means by which environmental benefits and economic profits can be enhanced due to the spreading out of weather and rotational stress risks.’
Hemp is the latest example of a new crop that is being added to rotations in an effort by farmers to diversify their production and marketing options. The inclusion of a crop like hemp comes with added risk of its own; however, it still may produce a net financial benefit when considering the reduction of risks related to operating one- or a two-crop rotation plan.
Focusing on diversification of crop sales, a related saying that I use often is, “look for base hits over home runs.” Studies have shown that the best farm marketers on average make more than eight to 10 sales throughout the marketing year. Looking for those singles and doubles instead of swinging for the fence at the risk of striking out, smaller sales allow you to tolerate a greater margin of error on decisions made at an unfavorable time or price.
We encourage producers to not only make smaller sales but to also make sales using many different contracting options. Getting to know your available marketing alternatives is a key first step in the effort to practice diversification.
Spot or forward cash sales are the primary methods by which grain is marketed during a typical crop year, but they might not always be the right course of action. Cash or forward sales work well if the expectation is for both futures to fall and basis weakens. Become informed on the various types of contracting offered by your local buyer, so that alternative action can be taken when higher futures or better basis is in your outlook and storing is not the preferred option.
Diversification, when used as a strategy to expand options available to farmers, is one of the most crucial foundation of a successful marketing plan. Examine your current production and marketing practices to determine if further diversification may benefit your farm.
Camp is the risk management specialist for AgriVisor, one of WFBF’s member benefits. This article appeared in WFBF’s Rural Route publication.