Wednesday, March 19, 2014

No Plan Survives Contact with the Enemy

I don't remember who coined the phrase, but in the 1800s a military strategist said it.  No plan survives contact with the enemy.  You can plan and plan, but the enemy has their own plan..and it's going to mess with yours.

Well, I've been building my own plan recently.  Over the last few weeks, I've cobbled together my marketing plan for the 2014 crop.  With the decline in grain prices from last year's levels, I thought it was important to build a plan that helps mitigate some risk.

I started with Put Options on my spring wheat.  I worked through a broker to buy 4 options (20,000 bushels total) as an insurance against price decline, locking in a strike price of $6.50.  The options cost 24 and 1/2 cents per bushel on the first two options and 26 cents on the second two.  There were also commissions and fees totaling about $260, which brings the average price to about 26 and 1/2 cents.  That basically means I locked in a floor price of $6.23 per bushel, regardless of what happens in the market.  And if prices rise...then I let the options lapse and still get the higher prices.

Next were the lentils, and I contracted half of my expected production with a local elevator.  The price on red lentils was $19 per hundred-weight (cwt), which is a dollar above the price I earned in 2013.  Just like on the faba contract, I have an Act of God provision in case of a drought or flood, and I also have to give that elevator the opportunity to buy any excess beyond the 3200 cwt that I contracted.

Finally, wheat prices increased recently (in part due to the events in Crimea with their own plans and contact with the enemy), so I contracted about a quarter of my expected wheat yield on a Futures Fixed contract.  I locked in a futures price of $7.33 per bushel.  The basis and quality premiums/discounts will be established this fall when I deliver the grain to the elevator.  Historically, the basis is 30-40 cents per bushel, leaving me a price of $6.93...which again is higher than what I earned on my 2013 crop.

So there it is, the plan is starting to come together.  I'm certain I won't hit the market highs...but I'm locking in a profit and that's what I care about.

Now, I wonder what will happen when I have first contact with the enemy...

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