Proof mathematically that marketing works

[tweety]

Ok so the challenge is this, show me mathematically over time (multiple years like say 7 to remove the luck and crop conditions factor) that using risk management tools are more profitable over time vs dollar cost averaging (selling 1/12 of the crop monthly for 12 months)

Or an even greater challenge would be that said risk management tools over time would be better then simply selling in the classic 6 months of higher prices using DCA over 6 months selling 1/6 of the crop.

Not philosophy or feelings. Math.

[dave4441]

I don't have any math, but I have a couple growers who sell every month or at least every quarter thru the year. I think many years they beat me as I tend to sell (grain for my own farm) based on a combination of fundamentals vs profit per acre. A huge amount of people market grain based on cash flow and bin space. Huge amount. Always hoping it will get better and seeing the market thru rose colored glasses that only point to higher prices later.

[riders2010]

What kind of grain can you sell every month? There is not one crop that you can say that about in our area.
Those so called tools are just another expense that allows the market to secure a lower price guarantee.

[dave4441]

You live on the moon or what's the deal?

[Klause]

Depends how many elevators are in his area Dave. Dauphin there's months were they won't even take canola locally. Oats 2 runs a year wheat maybe 6

We are fortunate around humboldt can sell something at any time all the time.



I think marketing works... Our three year aaverage are



Peas 7.57
Wheat 6.93
Canola 11.78
Oats 2.97


I'm not sure what selling every month equal amounts for 3 years would bring.

Tweety do yiu have that data?

[charliep]

I am struggling here in that everyone will sell their crop sometime during the year. So the question really is how a farmer does this in a way that meets their financial needs and their own individual situation. There is not one size that fits all farmers. I would hope that everyone looks at the their individual average price over the year versus a simple average and looks for ways to improve.

Perhaps the comparison is between someone who has a marketing plan that they have developed prior to seeding but adjusts during the crop year versus someone who has to 100 % see the crop in the bin in the fall/then starts the process of selling it.

The canola futures market is close to $500/tonne today. Put in basis but likely a sniff at close to $11/bu. That is today's opportunity/decision. Saying no is quite okay but recognize the market.

Like the joke about the guy who was accused of fishing with dynamite. His neighbor was game warden who heard the story but wanted to check out. So he took the neighbor out fishing. Out in the middle of the lake, the fisherman hands the warden a lit stick of dynamite and asks the question: Do you want to fish or cut bait?"

The market has rallied. You know what you have priced to date. You have a feeling for yield potential/risk. What are you going to do? Nothing is an okay answer.

[tweety]

1. Selling 1/12 or 1/6 of your grain doesn't mean you have to deliver it also in that month. You could be selling it a year away (deferred delivery contract) or same day (cash price). Selling it in the highest month usually makes the most sense.

2. Charlie, i'm not interested in what works for everyone. I'm after the math and proof that marketing thru existing "risk management" (and i use that term very loosely) is, over a long term average that removes the blind luck factor and crop variability, giving you more cash in your pocket then DCA.

Its really quite a simple question, but i want to see the math with the answer.

This should be really easy

[furrowtickler]

Nothing - yeild potential is any where from 10 to 50 bus /ac with a potential of zero - that the on ground reality at this point

[tweety]

Klause, i do not have that data but am sure a marketing specialist would have it readily.

[fjlip]

Agree, risky year to date. If we miss all rain, or early frost could be Crop Insurance year.

[tweety]

Please, lets focus on the question.

[cottonpicken]

Ill do it when I get home infront of a computer

[rook]

I remember reading an article in Country Guide over the past year or two about a professor at U of Guelph that did a study in this area, comparing different pricing scenarios. Of course he was using corn but the trends should have some correlation. I don't keep my magazines and I'm busy spraying so I can't dig into it right now but will try to in the future. Nothing about his conclusions sticks in my mind right now, maybe all the scenarios were a wash.

[farmaholic]

tweety, You pose a question I couldn't even begin to answer or if anyone even has the data for both sides of the comparison. Which numbers do you use and the possibilities are endless. You would have to have a Masters Degree in Actuarial Science to answer that question. To me it seems theoretically impossible.

[charliep]

Okay I will have a crack at it. I am not dealing with a whole crop - just for canola to sold off the combine. I have not included basis or option strategies. Just trying to make simple.

Looked at the November futures (weekly) from January to October using the years 2005 to 2014. This is 44 weeks of Friday closes for each of the 10 years. I then divided each year into quarterly averages: January to Mid March (planning time), Mid March to end May (spring), June to Mid August (summer) and Mid August to Mid Oct (harvest). The logic is to compare new crop pricing for a November contract over the period you might use as hedge to the futures price in the fall if you sold off the combine.

The first thing I did was an 10 year average price for each of the quarters.

Quarter 1/winter - November futures average $450/tonne.

Quarter 2/spring - November futures averaged $465/tonne.

Quarter 3/summer - November futures averaged $461/tonne.

Harvest - November futures average $436/tonne.

From this very simple and perhaps flawed analysis, the worst time to price canola for needed sales to pay fall bills is harvest time. The best is spring.

I then divided things up to look at each of the years to find out what quarter had the best and worst average November futures.

First surprise to me was only 2 quarters (spring and fall) took either of the extremes.

Spring (now) was the highest priced quarter (November futures) in 6 of the 10 years. Fall/harvest was the highest price in 4 of the 10 years (best price off the combine).

Surprise surprise, the lowest average November futures occurred off the combine in 6 of the 10 years. The other priced periods were quarter 1 (3 times) and quarter 2 (once).

What this tells me is that making the decision to pass on a spring price like today or when ever the canola market stops moving higher puts you in the category of potentially being really right or really wrong depending on the the rest of the summer. Place your bets/take your chances.

If you question was about the put premium, my response will be I buying insurance. Paying the money/not collecting is good thing. If you are sure prices can only go up/are rich enough to endure the pain of potentially, save your money.