Melvin Brees
Farm Management Specialist
University of Missouri Extension




Decisive Marketing

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October 27, 2000

Selling When You Don't Want To

Market price objectives or sales goals can be determined in a number of ways. Objectives may be based on technical market factors such as resistance levels or price retracements. Price goals may be based on prices that offer production profits or storage returns. Using market signals such as basis improvement is often a good method for targeting cash sales. Whatever market factors or signals you use, having market objectives and selling when they are met is a key to successful marketing.

What happens if you're not ready or not able to make cash sales when your objectives are met? Sometimes road or weather conditions prevent loading grain or making sales from on-farm storage. However, delaying cash sales until after January first to manage cash basis income tax is most often the reason given for not following through on market objectives, especially late-in-the-year sales. Many farmers carry inventory over into the next year. Selling large amounts of two years' production in one year can distort taxable income. In addition, the extra government program payment and any collected LDPs may have already inflated current year cash income. In these cases, additional sales could create significant tax liabilities.

While delaying sales might be a good tax management decision, it might not be a good marketing decision to pass up pricing opportunities. Some of the best soybean pricing opportunities for both the 1997 and 1998 crops occurred in late November and December. In late 1998 for corn and late 1999 for soybeans basis strength (narrowing) signaled cash sales opportunities. In some of these situations you had a second chance at other sales opportunities later in the marketing year. In others, you didn't. For example, not being ready to make soybean sales in November 1998 proved to be very costly--leading to large storage losses when prices declined throughout 1999.

Cash contracts can be used for cash market opportunities while avoiding cash sales. Forward contracting for later cash delivery is one method of taking advantage of higher prices and/or basis strength. This works well for on-farm stored grain and, in many cases, forward contracts can also be used for grain in commercial storage. A basis contract might be used to lock-in strengthened basis or a hedge-to-arrive contract used to lock in higher futures prices. If you haven't already claimed the LDP, avoid contracts or contract language that gives up title to the grain or beneficial interest.

The futures market provides alternatives to hedge or set price floors. Selling futures contracts allows you to hedge prices while delaying cash sales. Purchasing put options can be used to establish a price floor. The option strategy gives up the option premium (cost), but you still have the flexibility of selling the stored grain at higher prices if they occur later. Futures or options are a good choice if you expect additional basis strength (improvement) later.

Late year market opportunities may or may not occur. Once harvest is complete, basis typically strengthens (sometimes rapidly) and prices often rally prior to year-end. If late-year market opportunities do occur, be prepared to take advantage of them--even if you want or need to avoid cash sales.  --Melvin

University of Missouri ExtensionDecisive Marketing - October 27, 2000 -- Revised: April 20, 2004