Target Averaging

About: Target Averaging

A Simple, Low-Cost Marketing Tool for the Real World

   It’s fun to look back and see how grain marketing strategies change and evolve over the years.  For years, everyone was focused on price prediction. It was a continuous search to find the best “market guru” to help pick the highs in the market.  Then in the early 1990’s, grain option hedging became all the rage. “Nobody can predict the future, so let’s protect the downside with put options.”  A few years later, revenue-based crop insurance was introduced.  

   Today, we see many marketing firms focusing on a return per acre approach.  While we absolutely embrace this approach, many producers find it hard to implement.  Weather, yields, futures prices, basis values, and input costs are all unpredictable.  Even if you get a good handle on the numbers, what return on investment do you target with your grain sales- 5%, 10%, 20%?  Not to mention that a focus on your P&L can be very emotionally taxing as prices move up and down.  

   So, what is a producer to do?

   The Grain Originators at River Valley Cooperative would like to introduce a new tool that combats the stressful decisions growers formerly faced. The Target Averaging program is a simple, low-cost way to market grain based on a return per acre.

   Most growers are familiar with averaging contracts.  Averaging is simply selling a few bushels each day, to arrive at an average price over time.  Target Averaging is no different, except that bushels are only priced on days when the market is at or above the Target Price that you designate.  The Target Price does not lock in a price, but it represents the minimum futures price at which you are willing to make sales.

   If you can determine your cost of production based on your APH yields, then you can set your Target Price at this level.  Each day the market is above your Target Price, a few bushels will be sold on your behalf, averaging you into a positive return per acre. 

   No matter where you are, and no matter what you are doing, Target Averaging will be automatically making sales when the market allows.  While you won’t sell all your bushels at the high, you will sell some, and you’ll average into a price that is above your cost of production.

   For more details on the Target Averaging program or participate, please contact your River Valley Cooperative Grain Originator.  
 

How it Works:

1) Commit to a bushel amount. 

Tell us how many bushels you would like to enroll in the Target Averaging program.  You can enroll in old crop and/or new crop pricing periods. Just be sure to sign up prior to the enrollment deadline.  

Please note:  Depending on the Target Price you select and market action, there is no guarantee that your bushels will get priced.   

2) Designate a Target Price. 

The Target Price does not lock in a price, but it represents the minimum futures price at which you are willing to make sales.  For example, you might select a Target Price that represents your breakeven price to ensure that you are only averaging on days when prices are above your cost of production.

3) Let the averaging begin! 

Each day the futures market settles above your Target Price, a few bushels are sold at that day’s settlement price.  Each day the futures market settles below your Target Price, no bushels are sold, but they are put on hold and accumulated until the market returns to the Target Price.  If the market never reaches the Target Price, then the bushels remain unsold.

To participate in the Target Averaging program 
sign up before: 
December 31, 2019

Here is how Target Averaging would have performed in 2019 on December Corn Futures:

Here is how Target Averaging would have performed in 2019 on November Bean Futures: