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Bull market requires discipline, say successful area consultants

There is a sign in a hallway at Hurley & Associates in Charleston, Mo., that reads — $3 corn, $4 wheat and $7 beans need to be sold.

For sure, those are profitable price levels at most anyone's breakeven. But during a bull market, a market advisor's toughest challenge is balancing client optimism with good marketing practices.

“In a good year, you battle a producer's emotions,” said Ed Case, a senior marketing analyst at Hurley. “If a farmer has a $2 breakeven on corn, and the market is giving him an opportunity to lock in $3.50 today, from a profitability standpoint, it's a no-brainer.

“But it's easy to get caught up in the idea that if it goes higher, ‘I'm going to be disappointed that we didn't wait.’ Producers can get so caught up in the hype of the market.”

Take this fall and winter for example. Optimism abounds due to the current and projected future growth rate of the biofuels market. Corn demand for ethanol has pushed corn futures prices to over $4, and soybeans and wheat are riding its coattails to higher ground as well.

Case points to a recent forecast by Iowa State University that says to keep up with biofuel industry growth, the United States will require 17 million more acres of corn by 2013. “To sustain that level of shift into corn and ration the supply to meet demand would take corn to $4.05 a bushel.

“It's a demand-driven market, based on projections several years out, and a perception that we don't have enough acres to go around. And even if we shift acreage into corn at record levels — the biggest shift we've had recently is 3.3 million acres.”

While Case and fellow Hurley marketing consultants Bill Bullard and Karen Marshall are encouraged about the price outlook for their clients, they want them to understand another maxim — prices never stay at high levels very long, no matter how bright the outlook.

One thing to consider is that index and commodity funds might be influencing prices by 70 cents over what fundamentals would dictate, according to some studies. And tomorrow's price may hinge on whether China gets a rain in the Shandong Province or by the exchange rate between a foreign currency and the dollar.

The bottom line is that “marketing is not as black and white as it was,” Bullard says. “At one time, it was supply and demand. Now the biggest influence is the new money that's coming in.”

In fact, the markets have become so complex in recent years that many marketing advisors hire their own experts to monitor big fund positions and analyze their expected influence on the market.

Add to this the fact that farmers have less time for marketing, and it's not hard to imagine the community of marketing consultants growing.

Kelli Merritt, the co-founder of CropMark, a marketing consulting business in Lamesa, Texas, understands farmer psychology as well as anyone, having grown up on a cotton farm in Lamesa, “watching my father sell cotton at the end of the year. Of course it worked for him back then. But as time went by, I began to see that it didn't work.”

Merritt started working with options in the late 1980s to squeeze more money out of the family's production, and found her calling. “Farmers like to plant the seed, till the soil and nurture the plant, but many of them don't like the marketing part even though they realize they need to understand it. But it is the part of farming that I liked.”

Merritt went on to graduate from Texas A&M University's Master Marketer program and has worked as a day trader and as a commodities broker for Rosenthal-Collins Group.

She and Ag Market Network executive vice president Pat McClatchy started CropMark as a way to help neighboring farmers who were increasingly asking for Merritt's help in their marketing decisions. She deals with a full range of sophistication.

“Some want us to make every decision, and with them, we can do a more sophisticated strategy. Others are wanting to learn, and get to the point where they don't use us, so we start much simpler and work toward more sophisticated strategies in time. If you want to learn it yourself, we want to help you get there. But if you don't want to market yourself, we're here for that also.”

There is an old adage that farmers market two-thirds of their crop in the bottom third of the market, no compliment to their collective marketing skills. Marketing consultant are not going to hit the highs on a large portion of a crop because they often employ a scale-up approach, where the crop is sold in increments. The idea is to balance the risk of production with that of price.

“One of our sayings is that we are not out there to try and hit the homerun,” Bullard said. “We want to stay on base. We're never going to be able to sell the entire crop on the high, because we've sold some all the way up.”

A good time to discuss a marketing plan with a consultant is in January and February, “when farmers are putting together information for income tax purposes. We can make some cost projections for the coming year,” Case said. “Typically, we like to have something in place for the producer by the first of the year or shortly after the first of the year, because in most years, the first or second quarter of the year is the best time for marketing.”

A marketing consultant can determine a breakeven price, above which prices are profitable. According to Case, a breakeven should include cost of production as well as an expected return for the producer. “We have a fairly sophisticated software program to find each producer's cost of production, for the purposes of arriving at a breakeven cost.”

The challenge is different when the market doesn't appear to offer profitable sales.

“If you have breakevens that are above the market, or above where the market promises to go, it's difficult to do things that are profitable for the producer,” Case said. “It's disappointing for the both of us. But that doesn't mean you shouldn't be in the market.”

Chuck Danehower, Extension area specialist, farm management, University of Tennessee, says before you sign on with a marketing consultant, check out the firm or advisor's track record and history. After you make your choice, “be prepared to make a commitment to stick with it. Everybody is not right on the all time. So don't jump ship if they make a mistake. Give them some time.”

A good marketing consultant will tailor a marketing plan to address a particular producer's situation, his risk level and the comfort he has with the tools being used to manage his risk, noted Danehower.

Turning your crop over to a marketing consultant in itself may cause some anxiety, in that it may also require you let go of the crop legally — in some cases, giving a consultant limited power of attorney to make all your purchases. But there are advantages if you trust your consultant.

“That much control over the crop lets your marketer execute in a timely manner,” said Case. “When the opportunity presents itself, the marketing consultant already has the permission to pull the trigger. Oftentimes, the order is in place with elevators in advance of the market.”

“If we agree that we need to be 10 percent sold on $7 beans, then when beans hit $7, we make the sale,” Bullard said.

Another advantage — if the marketer is selling for several farmers at the same time, sometimes he's able to put a volume of bushels together and in turn demand a better basis.

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