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3614 Administrative Services Building
Ames, Iowa 50011-3614
(515) 294-9915

11/10/03

FOR IMMEDIATE RELEASE

Contacts:
Robert Wisner, Ag Economics, (515) 294-6310, wisner@iastate.edu
Jean McGuire, Continuing Education and Communication Services, (515) 294-7033, jmcguire@iastate.edu

Strategies for Selling Grain in Volatile Markets

Corn and soybean price volatility this fall has reached levels not seen for several years. The high volatility creates special challenges in marketing grain. Robert Wisner, Iowa State University Extension economist, offers several alternative strategies that may be helpful to farmers in coping with volatile markets. "Selling most of your crop at the top of the market is an unrealistic goal. A more workable goal is to sell grain at a price that at least covers the financial needs and goals of the individual farming operation."

One approach for marketing in volatile markets is a scale-up strategy, which increases sales on a rising market. This strategy can be applied by deciding ahead of time to market an additional quantity of grain for each pre-determined amount of increase in the price. Wisner said an example of this marketing strategy might be to sell an additional 10,000 bushels of grain with each additional 5 or 6 cent rise in the price. The quantity to sell would vary from one individual to another, along with the amount of price increase needed to trigger sales. The key is planning ahead and exercising discipline to carry out the plan.

The economist said another approach might be to use offer contracts with a local elevator, with instructions to sell a specific amount of grain if your price (or basis under futures) goal is reached. "In highly volatile markets, prices might reach your price goal for a brief period and then decline. Professional grain merchandisers who continuously watch the market can take advantage of brief upward price moves that farmers might not notice," Wisner said. "An offer contract typically would be designed to, in effect, say 'If the price reaches my goal, don't call me back. Just sell my grain,' " he added.

For farmers who understand technical market indicators, strategies can be tied to the behavior of moving average prices or an indicator called the relative strength index. For example, charting services often provide four-day, nine-day, and 18-day moving averages of closing futures prices. Some of these services are available at no cost on the Internet. In a strongly rising market, a sell signal is triggered when the four-day moving average drops below the longer-term moving averages. Wisner said that usually happens shortly after the market has reached a top. He added that the strategy does not guarantee that the top just reached will be the ultimate top of the market. However, it is a technique for delaying sales when this technical indicator says the trend is still upward.

Wisner said the relative strength index is another technical indicator that may provide insights into risk of the market turning downward. The relative strength index (RSI) theoretically ranges from zero to 100. If the index is below 20, the market generally is considered to be oversold and due for an upturn in prices. If it is above 80, the market is considered to be overbought and due for a downturn. In late October, the RSI on near-by soybean futures was over 90.

Another approach for dealing with volatile grain markets is to use decision-rule contracts (DRC) if they are available in markets where you sell grain, according to Wisner. These contracts provide computer-generated sales of a pre-determined amount of grain, with the computer using moving averages, the RSI or other technical indicators to trigger sales. Wisner said DRC contracts do not guarantee that grain will be sold at the ultimate top of the market, but they provide discipline to sell grain when technical indicators hint that prices may have reached a top.

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