Rising prices stoke emotions, too
Apr 15, 2011
The vast majority of producers we’ve spoken with over the years about marketing have told us it stresses them out. Even with the much higher prices we’ve seen since last summer, producers find marketing stressful. That’s because no one knows what’s around the corner.
As prices climb, so can anxiety. You may have spent a lot of time over the past several months wondering when and how much to sell. Many of you have been around marketing long enough to know that a myriad of factors can change prevailing market sentiment at almost any time and cause prices to tumble. Markets are incredibly quick to reverse their direction.
When prices rise significantly and then fall, we usually see three types of marketers emerge: the disillusioned marketer, the second-guesser and the focused, disciplined marketer. Recognizing the type of marketer you are is the first step to taking control of your marketing—instead of it controlling you.
1.) Disillusioned producers, unprepared for continuous volatility, make decisions that are neither interrelated nor based upon preset goals. Jaded and paralyzed by indecision, these producers second-guess the value of marketing.
2.) Second-guessers may have prepared for volatility and set goals for their risk and opportunity management, yet, distracted by volatility, they lose sight of their original marketing goals. These producers entertain feelings of loss when they sell in an up market and prices climb higher.
3.) Focused, disciplined producers have set their goals for risk and opportunity management. They are strategically prepared, execute with consistency and discipline, and maintain perspective during volatility.
Focused and disciplined producers don’t feel the same degree of stress as their counterparts. They take a long-term view of marketing and keep their eyes on the end prize: their weighted average price over time. Weighted average price is simply the value of priced bushels, un-priced bushels assigned the current market value, and hedge positions. Viewing your marketing without taking all of these factors into account paints a false picture of return on decisions made and allows emotion to drive future marketing decisions.
Volatility affects second-guessers the most. They’re inclined to jump in an out of the market, usually at the wrong time. As an example, when the market is rising, a second-guesser might sell, then regret having sold if prices climb higher. Unfortunately, when this type of marketer loses sight of his original goals, he forgets that selling and locking in profit can actually be a very smart move when done strategically.
Allow me to give you an example of the above, based on process that we see play out in real life all the time.
Let’s say a producer prices corn bushels at a $6.10 futures price. Soon after, the futures price rises to $7.20, and our producer thinks he made a mistake. We look into the situation and find he sold 20,000 bushels at that level. His production is 200,000 bushels, which means 10 percent of his estimated production was priced. Despite having sold only 10 percent, his gut tells him he’s behind and in need of making up ground, and he wants to buy back those bushels.
Putting pencil to paper, we find the weighted average price of his entire crop is $7.09 vs. the $7.20 futures price— hardly a difference when talking 10 percent of the crop.
To calculate the weighted average price in this scenario: 10 percent cash sold multiplied by the $6.10 futures price of those bushels (0.61¢) plus 90 percent of the un-priced bushels multiplied by the $7.20 futures price ($6.48). Thus, 0.61¢ + $6.48 = $7.09 for his weighted average price.
In this situation, we might look at locking in more of the $7.09 weighted average price as an opportunity to manage volatility and the downside risk. There would not be any need to buy back any of the 10 percent sold. When you view this 10 percent sale through the lens of a weighted average price, it eliminates an emotional response.
Every marketer, not just the second-guesser, has to look at overall goals for marketing. For example, your risk tolerance might dictate the ten percent sale above as part of an overall strategy to incrementally capture opportunity and manage risk. If the market goes down instead of continuing to trend upward, that sale becomes very important for managing risk. Incremental sales are part of an overall strategy to build the best possible weighted average price, taking into consideration your farm’s financial position and risk tolerance.
With the market having been on a wild ride, and the strong likelihood of future price volatility, I encourage you to take a few minutes and think about the type of marketer you are. Knowing your tendencies will help you think hard about your decisions and, I hope, commit to becoming focused and disciplined in your marketing.
If you want a quick answer to your strengths and weaknesses as a marketer, consider our Marketing Assessment Profile (MAP). It reveals what, if anything, prevents you from getting the most out of your marketing, and it’s free. Find out more about MAP by calling us at 800-334-9779 or clicking here.
Scott Stewart is president and CEO of Stewart-Peterson, a commodity marketing consulting firm based in West Bend, Wis. You may reach Scott at 800-334-9779, email him at firstname.lastname@example.org.
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