A Look Back - 30 Years Ago
Marketing ‘Dos and Don’ts’: A Basic Checklist / By Art Sogn / South Dakota State University Extension Economist — “True or false: ‘A farmer would rather not contract grain and have the price go down, than contract and have the price go up.’
“There is some truth in that statement, because there is, for all of us, a certain amount of chagrin if we contract and then see the price rise. For some reason, contracting and having the price go up is thought to be more of a failure than is not contracting and having the price drop. The former is thought to be our fault; the latter, ‘their’ fault — whoever ‘their’ may be.
“Fortunately, many farmers are taking a more realistic approach to marketing their products, including sunflower.
“In my opinion, there are a few simple ‘dos and don’ts’ required for consistently successful marketing. And then there are some additional strategies that require more time and management skill. The basic dos and don’ts are:
“1. Estimate your cost of production to the best of your ability. If you do not know your cost of production, you will not know whether a price offered allows you a profit or just locks in a loss.
“2. Selling and delivery of grain need not be — and very often should not be — simultaneous. If a person never looks at forward pricing, he loses six to nine months of time in which to choose a price. Therefore, it is to the sunflower producer’s advantage to be constantly in touch with the ‘to arrive’ price of sunflower. . . .
“3. Don’t try to pick the top of the market, because that is a near impossibility for anyone. Sell at least some of your expected production if and when a price is offered above your cost of production. ‘It’s better to sell a nickel too early than a dime too late.’
“4. Don’t sell your maximum anticipated production. Even though in some years it may be profitable to sell more than you expect to produce, in other years it can be costly to be a speculator.
“5. Know your cost of storage. If you are paying 14 percent interest on working capital and sunflower seeds are worth $13 per hundredweight, then your interest cost is 15.2 cents per 100 pounds per month. If you store for 10 months, the interest cost to carry the inventory would be $1.52 per hundredweight.”
Using the Soy Oil Hedge / By Tom Streifel, Merrill Lynch, Fargo, N.D. — “The majority of market analysts expect sunflower prices to rally into spring and decline into harvest under expectations of a sizeable increase in 1984 oilseed production. Given this projection, farmers are seeking ways to lock in prices and protect profits from the predicted price decline.
“Unfortunately, the only means of price protection available to most sunflower producers is a forward contract. As of this writing, forward contracts were averaging only $10.00 to $11.00 per hundredweight, depending on location. That’s four to five dollars below the current cash price; and most farmers are naturally reluctant to commit to such contract levels. . . .
“In their search for alternate means of price protection, aggressive producers have turned to the use of the futures market. Sunflower seed futures have not actively traded for a couple years now, so the only option available is soy oil. Soybean oil futures contracts are actively traded on the Chicago Board of Trade, with contracts now available into 1985. . . .
“The use of soybean oil futures to hedge sunflower is not 100 percent accurate, but it is the best method presently available. A producer who believes edible oil prices will decline can sell a soy oil contract, thus locking in the price trend. Soy oil and sun oil are competitive products, and the price trend of soy oil will dictate that of sun oil. Soy oil constitutes the largest portion of world edible oil stocks and thus sets the standard for world vegetable oil prices.
“Sunflower prices can be calculated by taking the soy oil price and adding the current or expected sun oil premium. Multiply this total times 40 percent — the oil value of sunflower. Then add a sun meal premium to this total of approximately $3.00 to $3.60 per hundredweight, depending on the relative feed grain prices.”
Crushing Margin: The Sunflower Processor’s Economic Life / By James Crawford, National Sun Industries, Enderlin, N.D. — “The sunflower processor’s economic life revolves around two words: ‘crushing margin.’ The crushing margin is the difference between the cost of buying seeds and the sales value of the meal and oil contained in the seeds, expressed in the sunflower industry in terms of dollars per ton or per hundredweight of seed.
“The crush margin figure can change very dramatically in our business. Sunflower has been an industry of substantial peaks and valleys, with the profitability of sun seed processing seldom holding to any sort of steady or gradual pattern. While related, the factors affecting the prices of sun meal, sun oil and the seed may be quite different at any given time.
“For example, a small sunflower seed crop can keep prices firm, while an abundance of protein sources can depress meal prices. Or a vegetable oil shortage can increase oil prices, while at the same time a large seed crop limits seed prices. Short-term radical changes can occur with an increase in seed prices (possibly due to exports) while meal and oil prices — which are tied to the soybean products — drop in value.
“There are also variations in seed quality and the discounts we take or premiums we pay. These factors can fluctuate significantly by crop year and by production area. The same is true of the oil and meal yields obtained from the seed. Our own processing efficiencies affect our yield — and thus the crush margin as well.”
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