An Introduction to Risk Assessed Marketing (RAM)

I have been writing the Risk Assessed Marketing (RAM) letter for several years, but only to a very limited number of growers because of the cost and time necessary to mail out the letter. Also, the market information becomes dated very quickly.

Risk Assessed Marketing Strategies are now included on this KSU web site. This will allow anyone who wants access to this information to receive it.

This letter is not an insurance letter or market newsletter. Therefore this letter will not replace any market letters or advisory services you currently purchase.

What you will not find in the RAM updates.

1. No market forecasts.

2. Strategies do not assume insurance coverage.

3. Strategies do not assume the use of a commodity broker.

4. Strategies do not assume margin calls.

5. Strategies do not assume a "current" price forecast. No attempt will be made to pick the top of the market.

What growers will find in the RAM updates are strategies for pricing a crop while limiting both price and yield risk. Profitable farming requires growers to produce a crop (generate inventory) and convert that inventory to cash (sell the crop). If a grower has a crop failure, then price makes no difference because there is no inventory to convert to cash. If a grower has crop failure but remains in the market, there is no difference between this grower and a Chicago speculative trader, neither will have inventory and both are in a speculative position.

What growers will find in the RAM updates.

1. Strategies for converting inventory to cash without greatly increasing risk. After all a grower must sell the crop sometime.

2. Strategies will include preharvest and post harvest marketing.

3. Strategies will also include Crop Revenue Coverage, CRC Plus^TM, and MVP-MPCI that will guarantee the inventory for preharvest sales. The alternative is self-insurance.

4. These strategies will include options so you will likely want to use a broker. Just say no if he wants to cross sell you other commodities or speculative positions. A local elevator may also offer close substitutes for options.

5. These strategies will be presented in easy steps. However, the strategies assume a basic understanding of options, basis, futures, hedge-to-arrive, forward contracts, and crop insurance. But don’t worry because this site will also include reference pages on these tools that you will want to print and retain as a reference.

6. You may also e-mail or call me with questions, but no price forecasting.

Other Considerations. The market is currently offering a bid for 1998, 1999, and 2000 corn. If you have not sold all of your 1998 crop (old crop) you effectively are saying no to the current offer and you may be right. The same is true for the 1999 crop. If you are saying no to the current offers, then one must assume you expect a higher offer later and you have a 50% chance of being right.

I am often told by farmers they cannot sell a crop they don’t have. As a grower you expect to have that crop for sale and you can insure that inventory using either CRC, CRC Plus^TM, or MVP-MPCI. These contracts all contain replacement coverage that replaces lost inventory (bushels) at current market price, not the FCIC forecasted price. The other type of crop insurance does not cover inventory replacement, a necessary condition for covered sales. With this type of crop insurance you can sell your bushel replacement guarantee ahead of harvest and have almost the same risk as selling grain out of the grain bin after harvest. The risk after the sale is that prices will increase.

Many growers say they eliminate risk by not preharvest selling. If the new crop soybean market were over $7.00 (less basis), and you have sold none, you are saying no to the offer but you have not eliminated risk. You still have the risk of a crop failure and that prices will be less than $7.00 (less basis) by harvest. The fact that you are farming creates price and yield risk.

Many farmers say they have no marketing plan. They may not have a written plan, but they do have a plan. The plan may be to sell at harvest or when the grower has a note due. I am only suggesting that one formally evaluate that plan.

At the end of the day, farmers must produce a crop (inventory) and convert the inventory to cash. How you convert grain inventory to cash will be the subject of the RAM updates.

Do not do anything unless you understand the strategy. If you are planning to execute one of the strategies but are unsure about the risk and expected results, please contact me, by phone, fax, or e-mail.

Conclusions. I think you will find these strategies for converting grain inventory in to cash far different from the approach used by many marketing advisory services. For that reason not everyone will like the approach of minimizing risk. If you like risk, this probably will not be your letter.

Expect a newsletter to be added about every other Friday during the summer, unless the market is really moving. Updates could happen every day.  You may also send me an email address and we will send you a note when the page is updated.