Take home the top third of the annual price range
Mar 10, 2006 9:52 AM, By Milo Hamilton
The Rice Marketing Prize is not a green Emmy or an agricultural Oscar, but it is perhaps the survival money skill of the next five years for U.S. rice producers.
HAMILTON
Many farmers understand the value of good marketing advice that gets their crops sold in the upper third or better of the annual price range. That is why I call getting the top of the range for each marketing year the Rice Marketing Prize. The prize is getting the most you can from every chunk of your rice selling price.
Some will pay for marketing consultants who perform just as they will pay for a good crop consultant. So, you might ask, how do I measure the marketing prize? Without sounding too much like a professor at the Rice Marketing University, I would point out that farmer-sellers fall into two categories: those who take personal responsibility for marketing their crops and seek advice and those who do not do so.
Above all, it amazes me how many farmers take the task of selling totally on their own without any coaching or consulting. A world-class runner does not train on his own; he has several coaches. He has the best equipment money can buy and he finds the event in which to perform.
In the case of a rice farmer, he can farm out the coaching function to a manager or a cooperative or he can do it himself based on his own outlook or on the basis of an expert whose job is to understand the market outlook. The events the farmer will run in are the local cash market, Chicago rice futures, and the loan deficiency payment game in Washington, D.C.
I have done a little study on how much money the top third of the rice farmers walk away from each year versus those farmers who sell in the bottom third of the annual price ranges. Here is the bottom line.
A farmer should want to take at least the top third share of three key price ranges that define his annual income stream. These three ranges are the futures price range, the range of the regional cash price spread to nearby futures, and the range in the LDP (loan deficiency payment) value. Add those three ranges over each crop season and you can come up with the total of the annual average ranges for the 2002-05 crop years.
The total range or fluctuation in each of these three key market prizes by rice region is:
Mississippi River: $5.37 per hundredweight.
Texas: $5.94 per hundredweight.
Southwest Louisiana: $5.94 per hundredweight.
If you dissect the above ranges and compare those who sold in the top one-third of the ranges against those who sold in the bottom one-third of the ranges, you have what I would call the “money left on the table” by those who sold in the bottom third of the range: Mississippi River: $2.15 per hundredweight.
Texas: $2.37 per hundredweight.
Southwest Louisiana: $2.37 per hundredweight.
Now let’s put the above in terms of money per farm. Just a simple average of all three regions comes to $2.30 per hundredweight. Multiply that $2.30 per hundredweight times an average yield of 70 hundredweight per acre and you have $161 per acre. That is a lot of marketing money left on the table or should I say on the acre. For a 500-acre rice farmer that is about $80,500 lost opportunity per year!
You should go back and look at your selling price and ask whether you are selling in the top one-third or the bottom one third. Each year, you should hold yourself, your marketing manager or your cooperative accountable for the returns you get.
If you or the one you allow to sell your crop is consistently selling in the bottom third, you may want to get a couple of more jobs to supplement your income, especially when subsidies go away. Even if they do not go away, $80,500 is a lot of money in my book.
I believe that the rice subsidy money is going away and perhaps all of that $282 per acre rice program payment you receive just for farming rice. I am told that on rice planted acres that total is currently nearer to $395 per acre.
So where will the money come from? You will have to pull it out of the market. In fact, the $161 per acre marketing prize is probably a conservative estimate of the prize over the next five years. Rice will be farmed for the program benefits or the open market returns. It is about that simple. I believe you can make more money without a subsidy because the price will shoot up.
U.S. rough rice prices have been quite volatile in the last three years, but right now the U.S. rough rice price is about the cheapest anywhere in the world. Did you know that?
If the rice subsidies go away, then the market becomes a lot higher with larger annual price ranges. The marketing prize as I have measured here will grow but so will your risk and penalty if you end up in the bottom third of the range.
The larger the share of the annual range for futures, the cash price spread and the LDP you can capture, the more likely you are to make money and stay in rice farming. It is really about that simple.
Oh, by the way, the LDP will probably evaporate next year even before the WTO or the budget-cutters get around to whittling down U.S. rice subsidies.
Profitable rice farming requires a harvested crop but also harvesting the rice price in the top third of all rice sellers. Stay in the bottom third at your peril.
For 18 years, Milo Hamilton ran the rice price risk and rice procurement operations for Uncle Ben’s Inc. Five years ago he co-founded two rice advisory services, Firstgrain Advisory Services, a customized hedging service for commercial rice firms and the Web site www.firstgrain.com.
