I have been involved in agricultural marketing for 20-odd years as an elevator manager, a commodity specialist and, for the past 17 seasons, a marketing consultant. I have worked with the markets all day, every day for longer than I care to remember.
You would think with that much experience, I would know just about everything there is to know about marketing crops, right?
If you think that, you would be wrong.
Recent markets have taken us all to school, beginner and grizzled veteran alike. They have reminded us there are always important lessons to be learned and if you plan on hanging around in this business, you had better pay attention.
Here are a few of the lessons we have recently learned in the marketing school of hard knocks. You may find them helpful:
Be prepared to price crop much earlier than you are used to.
Did you know that by the time you plant the first seed, more than one-half of your cotton, soybean, corn and milo marketing season is already history? Often the best chance you will have to market your crops at a decent price has also come and gone.
Most producers wait until they get the crop planted before they are willing to do much marketing. That is simply too late. Time and again we see the best prices of the marketing season show up early, sometimes very early. Will that happen every season? No, but it will happen more often than you think.
The markets are making it very clear: You must be prepared to market early. Make every effort to take advantage of the entire marketing season, not just the second half.
Price more of your crop at a time.
We have always been inclined to price crop early in the marketing season. Fortunately, that is a lesson I learned a long time ago. What I have learned recently is not to be timid. Instead of pricing in small increments when a decent price shows up early, why not take a big bite? Price enough of your expected crop to make a real difference.
Case in point. In March 2000, one year before the 2001 crop was planted, we suggested that our corn producers book 2001 corn with September '01 futures trading at $2.70. That was all well and good. Most corn producers can make money at that price point, especially if you are able to add an LDP.
Our mistake was not booking enough crop. If a price point makes sense for one-half the crop, why not for two-thirds or three-fourths?
“But what happens if I overbook and prices go up?” That is the obvious risk of pricing so much of your crop before you have even put a seed in the ground.
Every producer remembers that bad year when they didn't produce nearly as much crop as they expected. It is why the old rule of thumb says to never book more than one-half of your expected production before harvest.
Does that rule still apply? We don't think so.
Research show that the risk of substantially higher prices does not generally show up until you approach the growing season. That is when you need to worry about higher prices. We can limit that risk with the purchase of calls.
No, we can't always completely eliminate the risk of overbooking with the purchase of calls, but we can sure get a handle on it. That makes all the difference.
Do not base your marketing decisions solely on seasonal price patterns.
Anybody involved in marketing crops should be aware of the seasonal tendencies of our markets. You want to know when prices tend to go up and when they tend to go down. It is Marketing 101.
Should you base your marketing decisions on these patterns? The answer is yes and no.
It is important to know what the patterns are, but as we have seen recently, the markets do not always pay attention. Those of us who anticipated a typical spring rally last season are still waiting.
Some say our seasonal patterns are changing. That remains to be seen. What we do know is that seasonal patterns are helpful but they are not set in stone. They should be used as a guide, not as a rule-book.
Options are a great marketing tool but they do require finesse.
No question about it, options remain the most important risk management tool we have in the bag. Unless you possess a crystal ball and can predict the future, you must know how to use options to manage risk.
They do, however, require some finesse. Booking crop and buying calls is a great way to establish a minimum price floor while staying in the ballgame. The same can be said for buying puts to protect crop you have not priced. The problem with both strategies is the cost.
Learning ways to reduce that cost is essential. For example: We often use the “book crop/buy calls” strategy to manage price risk before harvest, but we will rarely do both at the same time. Usually the best time to book crop, when prices are rising and the market is very volatile, is not the best time to buy calls. Calls tend to be very expensive in that environment.
We have found we can dramatically reduce the cost of the calls if we buy our calls before we book or, in some cases, long after we book.
We may also use a more sophisticated strategy of buying a low strike call and selling a higher strike call (bull call spread) as a way to reduce the cost of the position. If you are going to use options in your marketing program — and you should — it is important to know how to use them efficiently.
Prices are still unpredictable.
Anybody who has not figured this out is just not paying attention. The markets have shown us time and again that prices are unpredictable.
Ask the cotton insiders who thought December cotton futures would trade to 70.00 last season? They were only 40 cents off the mark. Ask the wheat specialists who have been telling us for the last two seasons that wheat prices are poised for a bull market.
Ask a farmer who collected his LDP at harvest over the last couple of seasons and held on to his crops “because prices just can't go any lower.”
The lesson is clear: Do not base your marketing strategies on anyone's ability to predict the future. You will do much better managing risk instead of trying to figure out where prices are going.
That was true yesterday, it is true today and it will certainly be true tomorrow.
When it comes to marketing, there are always lessons to be learned. Our job is to pay attention.
Steve Scott is a marketing consultant with Scott & Associates. He can be reached at 1-800-206-2474 or [email protected]