I was a presenter at the Farm Futures Summit in Iowa City a few weeks ago and I thank the good folks at Farm Futures for the opportunity. For those in attendance, wasn’t it nice to see and talk to people in Ag again? I would like to review my presentation and share more on my 10 Ways to Make your Marketing Plan more bulletproof.
Stop searching for that price guru.
This is, in my opinion, the most important of the points I made. If you believe someone has a price prediction skill or information nobody else has, you will end up on the wrong side of price trends often. In the Spring of 2020 when prices were at a low point, the price forecasting crowds were telling you the outlook for price was not going to get better. I assume this had some influence on bushels sold at much lower prices. What I find interesting is how some of those who suggested selling on the lows are now offering advice at the higher levels. Why would you listen to them?
Don’t assume price is rational.
It is not. In the past few weeks, we have had deteriorating crop ratings on corn and soybeans only to be followed by lower opens when the night session opened for trade. There are many factors that influence price. And remember, at the CME it’s called a futures market, which means price is always looking ahead. In addition, the fund activity doesn’t usually care about the fundamentals of the crops you grow and animals you feed. They bring volatility and confusion to price. The more price moves, the more opportunity you are offered to defend price and capture opportunities.
I enjoy reading about our industry. I am also lucky to work for a company with lots of dedicated, intelligent people who are in constant communication with all aspects of the grain and livestock trade. We are tied into the cash trade as well as keeping on top of the prices in Chicago. However, despite all this knowledge and experience, it still doesn’t allow anyone an advantage of what will happen next on price. I know many believe knowing the right piece of information will lead you to know what will happen in the future. This is not true, but it’s okay to enjoy reading and staying educated on why price is at the current levels.
The vast majority of marketing plans involve selling what you grow and raise in the cash markets or holding off on sales. In my experience I don’t see this being effective. Emotions play a large part, especially when sell or don’t sell are your only choices. Those who sold early in 2020 now have a bias to not to sell 2021 production early. The opposite also happens in years where you wish you sold early by holding off the next year. This is a very tough way to succeed in marketing.
So, after last week’s USDA reports, do you like them for now? Probably not is my guess. Many have allowed the USDA to have too much influence in the prices you receive. I have no idea how effective the USDA is in their reporting, but I do believe they want to do a good job. Have they made mistakes? I am sure they have, but if we were able to manage risk of lower prices before they deliver a negative report the financial impact is significantly reduced if not eliminated. When USDA report days are negative to price most of you will be hurt. Why? Because you will not have much of ’21 or future years’ crops sold or managed for downside risk. It may work here and there but has backfired more than not because you are all the best in the world at what you do: raise a great crop.
Managing risk has a cost.
There is no way around this. However, we are seeing many contracts being offered that reduce or eliminate the cost to risk management. Free isn’t always free. In these contracts, such as accumulators, the cost is a real loss of flexibility. Less upside opportunity and less downside price coverage can be the result of a “free strategy”. As with any strategy, it’s about communication between you and your advisor and understanding what can happen once you execute.
The other cost of marketing is missing out on the big moves up or down. If you sell corn at $4 and it moved to $7, you have a cost of missed opportunities. There are effective ways to manage this volatility.
Learning how to manage price beyond sell or don’t sell can be a learned skill through education. Many of you reading this know this to be true. Simple is a relative term but I do believe simple works best when making price decisions. The secret is to find a trusted advisor who is willing to teach, listen and be patient as we all have different learning curves.
Basis and spreads
In addition to maximizing the flat price range of futures price, basis and spreads represent an important component to your eventual selling price. Use carry and basis to your advantage especially if you have on farm storage that is not utilized properly. Be sure your trusted advisor understands cash markets and knows how basis and spreads work.
Old crop control
This is important. In my experience, by having old crop under control you increase your odds of doing well managing price on the subsequent years. For example, those who found a way to continue to own the 2020 crops owning puts for stored bushels or owning calls against sold bushels were able to improve their minimum price during the rally. Therefore, they are more comfortable planning to manage price on the ‘21 crop and beyond because they aren’t dealing with the emotions of selling the ‘20 crop too quickly and at lower levels.
Find your comfort zone and be consistent.
Don’t change your style of marketing each and every year. For example, if you sold early last year and that didn’t work you now plan to avoid early marketing decisions. It’s just not that simple. Find a marketing method which you can repeat each year.
There are a number of key risk management principles that you should be performing. This is true whether you manage risk on your own or look for outside advisors who provide transparency and objectivity to help guide your marketing plan.
Contact Advance Trading at (800) 664-2321 or go to www.advance-trading.com.
Information provided may include opinions of the author and is subject to the following disclosures:
The risk of trading futures and options can be substantial. All information, publications, and material used and distributed by Advance Trading Inc. shall be construed as a solicitation. ATI does not maintain an independent research department as defined in CFTC Regulation 1.71. Information obtained from third-party sources is believed to be reliable, but its accuracy is not guaranteed by Advance Trading Inc. Past performance is not necessarily indicative of future results.
The opinions of the author are not necessarily those of Farm Futures or Farm Progress.