Marketing Strategy

You might have a marketing plan. Many farmers do have some sort of plan in place. What about a backup plan, a Plan B? Based on my conversations with farmers, I’d guess most do not, although it’s not because they don’t believe contingency planning isn’t important.

Contingency plans gain importance every day. It’s just a fact of business. Market volatility can erupt anytime, demanding that we all be prepared to change course. You’ve experienced first-hand the influence our global economy exerts on price. And just this week, I saw another article on climate change. Sure, weather is always a constant variable. Even so, it’s worth noticing that, according to the study referenced, if our temperatures stay within a range that governments around the world believe is possible, we could see more damaging heats waves than usual in the Corn Belt during the come decades. Clearly, this could lead to severe price swings.

You never know which way the market – like the ball in a pinball machine – is going to go. So you have to be ready for anything.

Yet, farmers, like many other businesspeople, can’t seem to find time to develop backup plans. And if time isn’t to blame for avoiding creation of backup plans, confidence might be. Some marketers fall in love with the only plan they create, a dangerous position. The business world is littered with examples of companies that failed or suffered a severe setback when Plan A failed and there wasn’t a fall-back.

Finally, we also see marketers who spend so much time on one plan that it prevents them from even thinking about a Plan B. Having finally reached a decision, they turn attention other work. The challenge is this: planning is never done. It’s an ongoing process.

To start on your path toward developing strong backup plans, look at strategic planning as a process in which you think through many possible scenarios and decide ahead of time how you will react to the potential challenges. Take a systematic approach to identifying what could cause price risk and opportunity, and determine how you will react.

We use a process called Market Scenario Planning^sm when planning for uncertainties. It’s similar to the contingency planning you do for field work at planting or harvest. For example, you have spare parts in case of a breakdown. Or if it rains, you have alternative plans of action for getting work done. Market Scenario Planning is a process of identifying potential situations, planning for those situations and moving ahead as needed when a situation occurs.

At left is what Market Scenario Planning looks like in theory.  The circles represent potential scenarios. Your goal is to think through how you will react if any of the scenarios become reality and price goes down a little or a lot, or up a little or a lot.

There are four keys to this type of planning. First, analyze all possible price scenarios based on fundamental and technical analysis, including outlier "what if" sorts of possibilities. Second, develop marketing strategies for each possible price scenario. Three, hold regular strategy discussions with your marketing advisor and change plans when necessary. Lastly, repeat the process regularly.

Here are seven steps to help  you get started with scenario planning:

1. Define the scope of your planning and the time frame (old crop new crop and next year’s crop)
2. Use fundamental and technical analysis to develop likely scenarios of where the market could go.
3. Identify triggers or signs to serve as indicators that a certain scenario is unfolding (for example, weather and news events).
4. Create a matrix that reflects ranges in the variables.
5. Test the various marketing strategies you use for each section in your matrix (for example, strategies such as no marketing plan, cash sales of 50% production at certain price, etc.)
6. Develop the discipline to act when triggers are hit.
7. Continuously create new scenarios and trigger points as each scenario unfolds.

The bottom line in all of this? Develop a Plan B, because if Plan A isn’t working, you still need to protect your bottom line.

If you’d like more information on the basics of strategic planning, you might want to check out our videos on the subject of marketing well amid volatility. 

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 scotts@stewart-peterson.com

The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Neither the information presented, nor any opinions expressed constitute a solicitation of the purchase or sale of any commodity. Those individuals acting on this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report.  Futures trading involves risk of loss and should be carefully considered before investing.  Past performance may not be indicative of future results. Any reproduction, republication or other use of the information and thoughts expressed herein, without the express written permission of Stewart-Peterson Inc., is strictly prohibited. Copyright 2012 Stewart-Peterson Inc. All rights reserved.

Guest blogger Bryan Doherty, senior market advisor with Stewart-Peterson Inc., has some ideas to help you protect yourself from getting beaten and bruised by the planting intentions report.

There’s a lot that you and I know. For instance, we know that intentions, weather and world events change. For that reason, I recommend that you not get too worked up about Friday’s planting intentions report. Certainly, respect the report. More importantly, prepare for surprises by becoming what I call aggressively conservative.

Let’s think about what the report can mean for the market. If the estimate for corn at 95 million acres is accurate, or if it comes in higher, the market will have a hard time rallying, unless we see a significant weather event down the road.

Right now, a lot of signs point toward downward price pressure on corn, high acreage being one of them. With a high amount of acres planted and prevailing good weather, you could be dealing with a price risk of anywhere from $4.50 to $4.

To be ready for this, get enough corn forward sold – enough so that you’re comfortable it will make a positive difference if prices drop. Then, buy puts on enough corn to shore up any real concerns that if there’s a washout in the market, you’ve done yourself a real favor by being defensively positioned.

Purchasing a put gives you the right to sell but not the obligation to sell. It acts like an insurance policy that puts a floor on the market yet leaves your expected production with an unlimited potential to appreciate should prices rally.

Strategically, I recommend you think in terms of balance. Looking at December corn near $5.50, it’s easy to make an argument for it to drop $1.50 or more. It’s just as easy to support an opinion for prices rallying to all-time new highs. The solution is to position for whatever the market may do rather than try to out-guess acreage and weather.

This is what I call an aggressively conservative approach. It means being positioned with all of your production for the market to move strongly in any direction. The idea is to capture upside if it’s there and position against major downside risk. Another way to put it: protect yourself from getting beaten and bruised.

What might you avoid doing? Positioning strongly for one direction, or doing nothing at all ahead of Friday - that would be taking an extremely aggressive approach.

To be clear, marketing isn’t quite as simple as forward contracting some production and buying puts on the remainder. There’s a lot to think about as you plan strategies, and many types of options strategies exist. At the same time, with some prior planning, there’s no need to stress over the upcoming report.

Typically, this report stirs emotions because it’s a big news event in a time a year when news events are sparse. There’s a lot of guessing going on. As the buzz grows, so too does anxiety. Plus, history has indicated that the market can move aggressively after the report. Despite this, unless there’s adverse weather, what really moves the market is the planting season getting started in earnest, which is when planting picks up in the South and pushes into key states like Illinois, Ohio, Indiana and Missouri during early April.

Do you remember last year’s report? The acreage intention number was high, resulting in a bearish reaction. Then, rain fell in the East and some producers abandoned crop ground. The snow melt in Canada flooded our river system in Northwest, causing farmers to abandon something like 1 to 1.5 million acres of crop ground due to flooding. The actual acreage number was reduced in the June report due to problems planting the crop. Prices rallied.

For the coming growing season, weather experts expect normalcy. Even so, it’s best to think about weather as something akin to shooting at a duck that’s flying away from you. It can change direction at any moment and move rapidly. Thus, you want more options than a single shot. The same goes for your marketing.

On a separate note, if you’re interested in learning more about puts, calls and other options strategies, we just wrote a detailed report. Click here for a copy.

Bryan Doherty is a senior market advisor with Stewart-Peterson Inc. You can reach Bryan at bdoherty@stewart-peterson.com. Scott Stewart is president and CEO of Stewart-Peterson Inc., a commodity marketing consulting firm based in West Bend, Wis. You may reach Scott at 800-334-9779, email him at scotts@stewart-peterson.com

The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Neither the information presented, nor any opinions expressed constitute a solicitation of the purchase or sale of any commodity. Those individuals acting on this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report. Futures trading involves risk of loss and should be carefully considered before investing. Past performance may not be indicative of future results. Any reproduction, republication or other use of the information and thoughts expressed herein, without the express written permission of Stewart-Peterson Inc., is strictly prohibited. Copyright 2012 Stewart-Peterson Inc. All rights reserved.

A business colleague came back from Indianapolis last week and told me about some of the dizzying price tags he saw while strolling around Super Bowl Village.

A ticket to a luncheon with members of the Pro Football Hall of Fame, he said, was going for $975. A ticket to the game five hours before kick-off was fetching $2,000. If you wanted a VIP pass to Volkswagen’s Rock & Roll Fan Tailgate Party, call your banker: $10,000. For a luxury suite in Lucas Oil Stadium, where the game was played, most Americans would have had to sell their homes to come up with the $240,000.

Despite these staggering numbers, you didn’t need to be wealthy to have fun last weekend. Fans had their first opportunity to attend Media Day, a great chance to see and hear players and coaches from the Giants and Patriots talk about the game. Tickets for this were just $25. Tickets for the Jimmy Fallon Show on Sunday night after the game: free. A seat for celebrity flag football: free.

No, you didn’t need to be wealthy. You simply needed to plan ahead. Those cheap and free tickets were scooped up almost immediately after becoming available.

I bring this up because once again life shows us another example of the difference planning can mean to the bottom line. Those who don’t think through the possibilities ahead of time can end up paying the price.

Just look at the potential for corn this year. With the stocks-to-use ratio being tight, a continuing debt crisis in Europe, rising tensions with Iran, and the ever-present weather wild card, corn in 2012 is shaping up as classic example of the need for pre-planning. We are seeing price projections from $3.50/bushel to over $10.00/bushel. This range easily translates into more than enough to purchase a Super Bowl luxury suite. Are you ready for whatever the market may do?

As always, I encourage to you to begin preparing for possible scenarios well ahead of time. Know what you will do no matter what the market does. Here’s an overview of the steps you can take to get it done:

·        - Analyze all the possible scenarios based on fundamental and technical analysis, along with "what-if" scenarios.

·        - Develop strategies for each possible price scenario. Set trigger points to signal when a particular scenario is unfolding.

·        - Execute the appropriate strategies, aware of the impact of your strategies on overall price.

·        - Repeat the process – strategic farm marketing is nothing if not dynamic.

Planning your marketing may not be nearly as fun as preparing for a weekend in Super Bowl Village. Still, in either case, if you have your moves mapped out ahead of time you’re apt to feel a lot better about your bottom line at the end of the day.

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 scotts@stewart-peterson.com

The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Neither the information presented, nor any opinions expressed constitute a solicitation of the purchase or sale of any commodity. Those individuals acting on this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report.  Futures trading involves risk of loss and should be carefully considered before investing.  Past performance may not be indicative of future results. Any reproduction, republication or other use of the information and thoughts expressed herein, without the express written permission of Stewart-Peterson Inc., is strictly prohibited. Copyright 2012 Stewart-Peterson Inc. All rights reserved.

Our firm attends quite a few industry events as a way of getting out and talking to farmers. Any given trade show or conference can give us a good pulse on what’s happening and what’s on farmers’ minds.

Usually we’re asked the standard question: "Where are commodity prices heading?" At last month’s Nebraska Power Farming Show, the questions had a strategic tone to them. Farmers were asking how certain events might affect commodity prices. They wanted to be prepared for the "what ifs." They wanted to know: How high might prices go? How low might prices go?

World events impact prices, sometimes in ways that can be difficult to grasp. World events are also unpredictable. And so it is right that farmers are asking questions about being strategically prepared in the face of uncertainty.

Here are the four big stories they asked about—the stories that are compelling farmers to be strategically prepared:

European debt crisis

Q. How is the situation in Europe going to impact our commodity markets? What should we watch for?

A. Unfortunately, this is something we will continue to hear about for quite a while. News on the debt crisis moves the market. Why? Uncertainty. Hedge fund managers and other commodity investors are skittish. Perception of what could happen is what fuels volatility. There’s a nagging feeling that everything could collapse, and so investors are always moving money to the safe haven du jour. The real problem here is not a specific trend. It’s not fear of declining exports to Europe, which are already down 30 percent since 2007. The problem is, simply, general uncertainty and investor skittishness.

China overheating

Q: We are concerned about the effect of China overheating. Is China pulling back to slow down its economy?

A: Commodity demand from China has been hand-to-mouth. The country has not been stockpiling like in the past, and that has hurt our exports. China experienced a really nice growing season for corn and soybeans, and in turn cut back to one-third of what they imported in beans and corn from the U.S. over last year. The root of China potentially overheating is real estate driven. Its real estate market is overbuilt and could cause them economic headaches. What’s most important to watch is what the U.S. dollar does – a higher dollar would hurt exports and place even more pressure on commodity prices.

Negativity toward USDA reports

Q: If we can’t trust the numbers, what can we do?

A: The next report comes out January 12. Pay attention to all reports and be alert to opportunities, yet don’t stake your marketing decisions on them. For years these reports have been creating stress. Often a number is a surprise because it is unexpected, and it is unexpected because it makes no sense based on the common knowledge that is out there. The market moves based on surprises. Usually, within a couple days after the report, the market resumes the original trend that was in place, and all the hoopla and news surrounding the report turns out to be nothing more than a distraction. If the report does change the trend of the market, your strategy should be in place to respond to the trend or change. So the bottom line is, pre-plan what you will do when the market changes, and be disciplined to act, regardless of whether the report, or some other event, becomes the catalyst.

Ethanol blender’s credit

Q: What about the impact of this subsidy ending (which has given a 45-cent-per-gallon tax credit to ethanol blenders for the past 30 years)? Will it result in ethanol plants needing less corn?

A: As 2011 drew to a close, there was a big push from blenders to pull in higher-than-normal volumes of ethanol because they expected to lose their 45 cents for each gallon of ethanol that they mixed into gasoline. There’s another thirst for ethanol: exports. Through three quarters of 2011, we exported 640.7-million gallons. That was 240-million gallons more than all of 2010.

The tax credit had an impact. Once again, though, a bigger concern would be strengthening of the U.S. dollar relative to key export countries. If that happens, the incentive to produce so much ethanol will decline.

So how do you stare down this uncertainty? As these four ongoing news stories illustrate, there’s no way to know for certain what’s going to happen. That’s okay. You can pre-plan what you will do if prices climb a lot, fall far, or do anything in between. In essence, this is what farmers at the Nebraska Power Farming Show were asking. What could happen to prices if . . .?

Tackle uncertainty head on by developing dynamic strategies for all price scenarios to protect you from extreme risk and to capture higher prices when they’re available. That way, when the markets get emotional about European news, USDA reports, China, changes in ethanol production, or other news, you can remain level-headed.

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 scotts@stewart-peterson.com

The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Neither the information presented, nor any opinions expressed constitute a solicitation of the purchase or sale of any commodity. Those individuals acting on this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report.  Futures trading involves risk of loss and should be carefully considered before investing.  Past performance may not be indicative of future results. Any reproduction, republication or other use of the information and thoughts expressed herein, without the express written permission of Stewart-Peterson Inc., is strictly prohibited. Copyright 2012 Stewart-Peterson Inc. All rights reserved.

I have been following economic projections from Brian Beaulieu, an economist at the Institute for Trend Research (ITR), for the past 10 years. Overall, I’ve found his forecasts to be highly accurate. As an example, in 2003 he predicted the 2008 recession within months. ITR’s track record over the past 60 years is very impressive.

Beaulieu spoke at a meeting I attended this month and offered economic scenarios for the next 20 years. You can add his voice to the chorus expecting an era of permanent volatility. Assuming he’s correct, the road ahead looks like a roller-coaster.

You might find the details of his economic outlook helpful to your marketing. I’m not suggesting you base your marketing on an outlook approach. Rather, you could use the following scenarios he described when planning your strategies.

Bad news first. Beaulieu expects three recessions by the year 2019, including the most recent one from which we have "officially" emerged. That would make three recessions in 10 years. Between World War II and 2001, we endured on average only two recessions every 10 years.

Beaulieu is hopeful that by 2020, multiple recessions will have created political motivation to change the tax code. One of the biggest problems our country faces is the tax code. If it’s not improved, ITR expects to see a 10-year recession beginning somewhere in the 2025 to 2030 window, with the potential for widespread poverty and inter-city riots like we saw in the ‘60s.

Our budget deficit presents a severe challenge with far-reaching implications, and it could be compounded. He indicated that the current long-term projections for potential budget deficits are wholly and completely unrealistic and inaccurate. Those projections, Beaulieu said, are based on the Office of Management and Budget (OMB) using an economic growth rate of 5.04%. Yet, since World War II we have averaged 3.28%.

If you believe the next 10 to 20 years won’t be nearly as economically vibrant as the past 20 years, you have to question the growth rate figures.

He estimates that budget deficits will run at least 50% higher than projected. I tend to think we’re more likely to see deficits one to two times greater than projected.

Why is there disparity in the numbers? I can’t say for sure. I do know the OMB derives its figure by following input from Congress and whoever the administration may be at the time. If OMB projections are wrong and the deficit doesn’t subside, watch for the roller-coaster. Historically, unresolved debt fuels inflation followed by the painful cure, recession.

A recession increases unemployment, decreases spending and weakens the U.S. dollar (USD) – bad news for the economy.

On the other hand, a weak USD, relative to currencies of our agricultural trading partners, is good for exports. It could support grain and dairy prices. Beaulieu expects the USD to be weaker over the next three years against Canadian, Australian and New Zealand currencies. He says the Canadian economy is sending positive signals due to good demographics, strong natural resources and a balanced budget. Australia and New Zealand are also in this positive position, with good demographics and natural resources.

If we see high corn prices, there’s still the question of profits. High corn could also help to drive up, or at least sustain, the prices you pay to rent and purchase land. Oil in the mid-$120/barrel range by 2013, driven by demand from Asia and South America, will also impact production costs.

Inflation will drive up your input costs, too. Beaulieu believes a few factors could be behind this: Our government’s desire for inflation to help cover the cost of the national debt, higher labor costs here and abroad, and the high cost of our country’s green movement. Other market-moving scenarios constantly lurk all around us. You’re already familiar with them – drought, floods and world economic turmoil to name just a few.

Personally, I find economic forecasts compelling, and it’s not because I believe they paint an accurate picture of the future. It’s what you do with the information that’s most important. Knowing potential economic trends and considering the possible impacts on your marketing are the first steps to preparing for whatever the market may do. If you’re ready for a downturn, you can prosper through it instead of being punished by it.

I encourage you to remain knowledgeable about the big economic picture. As you may have read in this space before, I believe there are three broad keys to positioning your business for long-term success: 1.) Prepare your marketing for any scenario, 2.) Get out of debt, and  3.) Maximize the opportunities in the years ahead.

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 scotts@stewart-peterson.com.

The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Neither the information presented, nor any opinions expressed constitute a solicitation of the purchase or sale of any commodity. Those individuals acting on this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report.  Futures trading involves risk of loss and should be carefully considered before investing.  Past performance may not be indicative of future results. Any reproduction, republication or other use of the information and thoughts expressed herein, without the express written permission of Stewart-Peterson Inc., is strictly prohibited. Copyright 2011 Stewart-Peterson Inc. All rights reserved.