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Contributor

Market doesn't care....

Roy Smith's got an interesting point in his new article: The market does not care what it costs you to grow your crops.

 

He points to a study showing that using the cost of production to time sales does nothing to improve your profitability. I guess I never quite looked at things this way.

 

How much do you consider your cost of production in timing sales, if at all?

 

Heres that story: Roy's article.

 

Rob

 

p.s. -- Interesting to see that Roy credits our marketing talk group for getting this discussion going.

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7 Replies
Senior Contributor

Re: Market doesn't care....

I believe the same. The market cares nothing about break evens. On the other hand, prices for grain that force farmers to alternative crops can cause higher prices the NEXT cycle. But that only works for those who can reasonably grow alternatives that aren't part of the same complex of grains they're in. Otherwise some farmers rely on trying to grow MORE of what they are growing knowing that growing less means more losses or less income. Except unless you can control the weather and acres around the globe one might just be increasing risk using more inputs. Daryll Ray has well documented this cycle.

 

I think marketing plans are for the purpose of selling for the maximum and reducing the risk that you would sell for a minimum. There are various strategies as we know. Knowing your break even doesn't affect market moves. If you sell for the highest you think you can risk then it stands to reason that you will minimize your losses or increase your profits in any case. Theoretically (I think) if all farmers waited to market until a return was assured probably the same areas would sell at similar prices or times and those with higher requirements would lag or miss the opportunities. Some farmers grow some crops for additional reasons other than profit, and aren't too much bothered if a small fraction of their income is from a field grown for rotational reason.

 

Anyway, contrary to recommendations I aim for the top and am satisfied if I get close.

 

 

 

 

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Senior Advisor

Re: Market doesn't care....

So much for those folks that claim that cost of production determines price. The same guys think that taxes on businesses is passed on to consumers. The truth is that my  $500 dap will not affect my selling price of corn. Corps cannot pass on their costs or taxes unless they are competitive with their competition.

 

Besides if was as easy for corps to recover those tax dollars from consumers why are they adament about not wanting tax increases? Heck, I would npt mind a tax increase if I could pass it on to the local coop.

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Veteran Advisor

Re: Market doesn't care....

Of course it doesn't determine price.

 

But a careful analysis of COP is a good place to start in determing whether prices are bidding at a level that should get your interest in making some sales- particularly if prices are above your COP.

 

But as to whether the market says "this is Joe's ( or the average) COP so I have to respect it- of course not.

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Veteran Advisor

Re: Market doesn't care....

Dairy farming for the ;ast 36 months is an excellent example!  COP didn't deter any of us that the banker let keep going.

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Senior Contributor

The long Term View

in the short term, the cost of production may not mean much. But if you are trying to look out a few years, and budget income and expenses to leave a profit, you are not going to be very successful by not determining your COP and marketing accordingly. Not many savvy operators are going to be selling future contracts a year or two out below the COP, so you can probably wait and get your needed number on a crop production scare or other event.

 

However, now with the us dollar in freefall, all budgets are meaningless and it is impossible to  plan anything. THe person that plans and sells "like grandpa did" is in the drivers seat, and has been for the last few years, with the exception of the 2009 crop unless he waited for the summer to end and the ralley to start. Not planning, not forward contracting, just sitting on stored grain is the proper strategy in an inflationary environment.

 

I would think that at some point the futures markets will have to bid more than what seems reasonable to ensure a supply if enough people get burned , and enough times.

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Senior Advisor

Re: The long Term View

So Red, what will you do if you have prime Iowa farm ground and the price of corn and soybeans are projecting a loss for the next two years? What will you do? Sell the farm? Or refuse to rent it/ In which cases someone else will farm it and try to make a buck. There are not too many opportunities for alternative crops because most tof them will have prices in the crapper as well.

 

 

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Advisor

Re: Market doesn't care....

rob, i always appreciate your comments in march concerning crop insurance. could you click on my name, send me and email, and re-explain how the grp yield determination is made? I buy the highest level grp. I think it was the 150% . The grip premiums have really gone up, so switched to grp in one co. I'm the only policy my agency sells.

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