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Corn+Soybean Digest

The 2000 Marketing Trap

Traveling the seminar circuit in December and January has once again been a rewarding and educational experience. Except for looking on USDA's Web page for the amount of grain that has been put under loan or LDP'd, I've found that the seminar circuit is the easiest way to learn what farmers are doing in marketing this year.

It's obvious that two factors have allowed many of your neighbors to put off the marketing decision once again. Those two factors are the amount of money collected under LDPs and the amount of money collected from the government via the Emergency Aid Package in early December. Since people don't need the money, why should they worry about marketing now? Unfortunately, it didn't take much of an excuse for many of your neighbors to put off making marketing decisions.

The other interesting piece of information I've learned in the last two months is that the "marketing plan based on cost of production" is back in vogue. As we all know, commodity prices and farming both run in cycles. The type of marketing programs used by farmers also runs in cycles.

Many ag lenders and college professors may want to hang me for making this statement: Over the long-run, marketing programs based only on cost of production will not work. Don't misunderstand me. Knowing cost of production is absolutely important in making marketing decisions. What I'm saying is that a rigid marketing program - based only on cost of production and not on other outside marketing factors - will lead to disaster.

It's also important to note that this marketing plan becomes popular at the end of every major bear market. Why? It's easy to look back and recognize that this type of marketing program would have worked well over the last two years. That doesn't mean it will work well over the next two years.

Here's why you have to be careful of a rigid marketing program based on the cost of production.

Assume you have a neighbor whose cost of production for corn is $2.10/bu. His "rigid marketing program" calls for scale-up selling starting at $2.15 and being sold out at $2.65. In last year's bear market, he started marketing when corn was at $2. He couldn't sell then because the market wasn't at his subjective selling price. He therefore ended up riding the market all the way down until August and finally letting his corn go for $1.50.

Which is better - $2 or $1.50? Sometimes the best marketing plan is based not on how much money we can make, but on how little we can lose.

The opposite will happen in a bull market. Consider what would have happened with this marketing program in 1996 when corn went to $5/bu. The bottom line: In the majority years, a rigid marketing plan based only on cost of production will result in very few, if any, sales in a bear market and almost always selling too early in a bull market.

Parting thoughts: The first ingredient in any marketing program should focus on how you're going to make decisions. You must have a method to force you into pulling the marketing trigger rather than merely waiting until you need the money or the bin space for next year's crop.

To me, the last month has been relatively simple. We recommended "merchandising" the majority of corn and soybeans because the basis is historically tight. Re-owning the grain in either a futures or options strategy from this point on will be less expensive than holding the grain in the bin.

Remember, the merchandising and pricing decisions should be made separately.

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