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June 2009 Archive for Marketing Strategy

RSS By: Scott Stewart, AgWeb.com

Marketing Strategy

Wanna Bet on the USDA Report?

Jun 26, 2009
You clicked here thinking you’d get another opinion on what the June 30 USDA Crop Report will say, or reaction to it. I’m here to tell you to relax.
 
All too often, well-meaning market advisors and producers get too wrapped up in these types of things. We like being “right” about the market, knowing where prices are going and feeling smart about our fundamental or technical analysis. This is all great if it works. Unfortunately, being right doesn’t matter much. All that really matters is what prices do.
 
I remember one time being totally bearish on the corn market. Based on the fundamental supply/demand analysis, I felt it would fall another 30 to 40 cents. It was autumn, we had a big crop coming and there was no reason for markets to rally. All the fundamentals were bearish. I joined in, believing I knew where the market would go because all the fundamentals were in place.
 
Lo and behold, weather forecasters started predicting a drought for the following summer. It didn’t matter that summer was still eight to ten months off. Corn prices rallied nearly 50 cents, and soybean prices rallied almost a dollar. To be sure, the rally did not last, and prices eventually receded to where I had expected them to go. In the meantime, I got my butt kicked.
 
Was I correct on my market prediction? Ultimately, yes. Did I lose money? Yes. Why? Because all that matters is what prices actually do—not what they are expected to do, or should do. Prices rose. It didn’t matter why. It didn’t matter that it made no sense at the time, and it didn’t matter that prices ultimately declined again. What mattered was that prices rose enough in the short run to reclaim my equity in my hedges, knock me out of my hedges and put me in a weak position. I had been blindsided, both in my equity position and in my mind.
 
My point is that being right on the market does not make you money. Taking advantage of price moves will win or lose the game. Remember that the only standard by which you should measure your success in commodity marketing is your final average price per bushel on all your crops. All you should care about is increasing the revenue per acre. (If you use a market advisor, hold him or her to this standard as well!)
 
We are talking financial success here—the kind you can smile about, your banker can smile about, and your spouse can definitely smile about. The kind of success that ultimately lets you sleep better at night. You can confidently plant your next crop knowing you have the strategies in place for marketing success.
 
So, listen to the USDA Report numbers if you care to. But realize that usually, within a couple of days, the market goes back and resumes the original trend that was in place, and all the hoopla and news surrounding it turns out to be nothing but a distraction. If it does change the trend of the market, your strategies should be in place to respond to the trend change and/or the change in supplies. Those are fundamental changes. The fact that those changes came as a result of the report shouldn’t be a big factor.
 
Spend your time thinking through your marketing strategies. Know what you are going to do if the market goes up a little, up a lot, down a little or down a lot. Be disciplined enough to stick to your strategies. And enjoy being a successful producer and marketer.
 
One more thought-- If you really can’t resist the urge to try to outguess the USDA Report, I suggest you bet your buddy on it. Don’t bet your crop and your livelihood on it.
 
Scott Stewart is president and CEO of Stewart-Peterson, a commodity marketing education and advisory firm based in West Bend, Wis. You may reach Scott at 800-334-9779 or email him at scotts@stewart-peterson.com.

The Price of Independence is Improving Your Marketing

Jun 14, 2009
A reader commenting on my last posting (Greedy or Opportunistic) asked the question, “How are we supposed to know what a good price is when inputs and crops are no longer based on true supply and demand?”
        Fair question. We certainly are in “new times” when it comes to marketing crops. Marketing today is more difficult than it has ever been. In the old days (just a few years ago), most producers knew that if they started selling corn in the upper $2 or $3 range, they would be pretty happy with that decision. Sure, once in awhile corn went to $4 and they wished they hadn’t sold, but that was the exception rather than the rule.
        Within the last two years or so, many producers forward priced one, two, even three years worth of corn crops in the low $4 range, thinking it was a wise decision they would never regret. Then they got their fertilizer and land rent bills. Ouch! All of the sudden $4.00 corn wasn’t enough to pay the bills.
        How should you change up your marketing when your input costs and crop prices are unlike anything you’ve ever seen? I’ll go back to my basic principles:
  • Stop trying to out-guess prices. A good business person (producer) typically waits to make a decision until he or she has enough information to make a sound decision.  In commodity marketing, by the time you’ve gathered all the information, the price move is over and you are almost assured of pulling the trigger just when you are the most wrong. And with today’s markets, you are not going to be wrong by 20 or 30 cents. You might be wrong by $1 to $3. No one can afford to miss by that much.
  • Be strategic. Create a decision-making process—a set of strategies—so you know how you will react to various market moves: a small upward price move, a large upward move, a small downward move, or a large downward move. Create this set of strategies for your old crop, your current crop and next year's crop. Review your strategies regularly and be prepared to adjust them as market conditions evolve. Your triggers and your contingencies are thought out and structured in advance. So you’re ready for whatever the market dishes out.
  • Always take as much as the market will give you. Even if you know your input costs, be careful not to get sucked into believing that good marketing begins with your breakeven. You don’t even know your breakeven until after the crop is in the bin, because yield varies. Sure, selling at a reasonable margin can be a good idea, but you must have a buyback strategy in place so that if prices go substantially higher, you have ownership of crop and are in a position to maximize that opportunity. That’s what will carry you through in the years of massive supply when the market never reaches your breakeven.
I believe so strongly in the importance of good marketing because of its potential to help producers remain independent and successful. In South America, big agricultural corporations reach down to the farm level and offer financing, the supply of inputs and other services in exchange for the crop. The attraction of guaranteed revenue, lower cash flow needs, predictability and all the other conveniences that go along with this are certainly alluring. But I believe there is a better way—for the producer and for American agriculture. If our producers maintain and continuously improve their ability to make individual marketing decisions, they will go a long way toward maintaining profitability. They will not need the help of a corporation. They will be independent and successful.
So the question is this: Would you trade simplicity for your independence? Or would you make the commitment to become a knowledgeable, successful and strategic marketer?
 
Scott Stewart is president and CEO of Stewart-Peterson, a commodity marketing education and advisory firm based in West Bend, Wis. You may reach Scott at 800-334-9779 or email him at scotts@stewart-peterson.com.
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