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Corn+Soybean Digest

Why Farmers Can't Pull The Pricing

There's a miserable reality when it comes to farmers' marketing track record.

It's this: Roughly two-thirds of the grain is sold in the bottom third of the price range for the marketing year.

That's poor risk management.

In other words, many farmers are notorious for talking when prices are high and selling when they're low.

The $64 question is, "Why?"

In a nutshell, say marketing specialists, it boils down to a lack of discipline and letting emotion get away from you. Defeating that emotion in a rising or falling market isn't easy, they agree. But it's possible - and dandy for your bottom line.

First, advise marketing specialists, make a written marketing plan, based on your cost of production plus a profit, that takes into consideration the fundamental factors of supply and demand. It'll help you keep your wits later.

"You need to come to grips with your emotional self the first day of your plan," challenges Mark Schultz, a market adviser and trader with NorthStar Commodity Investment Co. "You need to say to yourself, 'I'm not going to catch the market high for the year, nor am I going to end up selling at the market low. But I want to get in the upper third of the yearly average price range and stay away from being in the lower third with the bulk of my grain.'

"You need to sell in increments, preferably with a scale-up approach, selling a bigger percentage as prices move higher. Hitting a home run - the market high - could be fabulous. But you can also strike out and not be around for the next go- around," Schultz cautions.

Leroy Louwagie, president of Professional Marketing Associates, couldn't agree more.

"One of the primary reasons farmers can't pull the pricing trigger, even if prices are at a profitable level, is emotion," Louwagie declares. "They listen to the radio and one station says this, another says something else and their DTN box says something else. And they come away from that input with big dreams - dreams of what it could be, not reality."

More farmers need to operate like a well-operated business and start looking at percentage of return on their investment per sale - instead of trying to make the big hit and heal all those wounds from the past 10 years when they got hurt, Louwagie challenges.

"It's a great conversation piece when prices are high," notes Louwagie. "The farmer feels good; he's emotionally strong and pumped up at the time. But then prices start taking a dive. All of a sudden stress sets in and he looks at what he's got for bills to be paid and how his plans and dreams are falling apart. So to get rid of the emotional pain, he just dumps the grain when prices are low. That creates a big problem."

Farmers hurt themselves two other ways when pricing grain, say the experts. Many get hung up on price per bushel, and they don't plan ahead but sell when they need the money.

"It's profit per acre, not only price per bushel, that determines your bottom line," Schultz insists. "If they look at it that way, it becomes much easier to do their marketing.

"If they wait until their cash flow situation tells them they have to sell their grain, that's when a lot of others are doing the same thing, and prices are low," Schultz adds. "They need to learn to think and market three, four and five months ahead of that point."

What do farmers say about the emotional factors involved in pricing grain and how best to combat them?

Soybean Digest asked several who use marketing advisers, understand the marketing tools available to them and feel good about their marketing track records.

"It's an emotional thing for sure," says Chuck Schaible, Delavan, MN. "My perspective is you get personally attached to the grain. That's why I'm working with Mark Schultz. It helps take the emotion out of it for me. I don't always agree with him, but, most often, he's right. He's not emotionally attached to the grain and can see things more objectively."

Schaible sells most of his grain directly from the field, but it's priced well ahead of the normal harvesttime price crunch. What he doesn't get sold ahead, he usually sells anyway and re-owns on paper anything he's not satisfied with - assuming that longer-term fundamentals turn more positive.

"Once many farmers get grain in the bin, they just can't seem to part with it," Schaible asserts. "But that can ruin their profit opportunities."

Dale Rogers, Cleveland, MN, uses a couple of market advisory services and also listens to sharp older people. He didn't own a bushel of grain at the end of last November - and he's a happy camper.

"I used the LDP (loan deficiency payment) program, added 62 cents a bushel to what I sold beans for and, hey, I'm happy. I have no storage costs. I had good yields, 54.3 bu/acre for the entire acreage, and got a $5.40/bu average for the entire crop. That isn't a bad gross considering the global situation.

"My dad always said when it came to selling hogs, you never go broke taking a profit. He always said, sell on an up market - when they want them, not when they don't. The same applies to grain."

Terry Schulz, who runs Schulz Farms with his brother Steve at New Hampton, IA, usually has about 80% of their crop sold ahead of harvest. Last fall he had only about one-third sold, but he's happy.

"We'll end up with over a $6/bu average for all of our '98-crop beans, and we got a 54-bu/acre overall yield average. The government was generous last year, too, with the LDP. I'm very pleased with that."

Schulz is comfortable using several marketing tools, including those offered by the futures market. And he uses a market adviser. The Schulzes also don't store beans.

"I get rid of them. It costs a lot of money to store beans, and most people don't calculate the interest and storage costs. If the market turns up due to a real fundamental change, we'll re-own them using the futures market.

"We shoot for making a profit, not topping the market, which helps take some of the emotional stress out of marketing."

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