Guest blogger Lucas Qualmann, researcher with Stewart-Peterson Inc., shares his personal experience of feeling like Dr. Jekyll and Mr. Hyde when managing commodity price risk. He’s happy to report he has recovered from his affliction.
In 2013, I felt like I was two different people. I would spend my weekdays as a researcher, studying commodity markets and pricing strategies from a mathematical perspective. Then I’d head back to the family farm on weekends and become someone else.
My story actually begins a while ago, during the time I grew up on the farm. I learned a lot from my parents. My dad had always taken responsibility for selling our farm’s production, and so I learned how to do that from him. Like many other farmers, his goal was to get the best possible price, usually by taking cues from the weather and market news.
He’d often say things like, "When the price hits $X we’re going to sell everything in the bin." And, "Why sell now if we think the price is going to go higher?"
Sometimes those commodities would hit their targets, and soon the talk would change to, "Let’s wait until it gets to $XX now, then we’ll sell." I went along with that thinking. Our decisions usually were reinforced by the news and perspectives from other farmers.
By the time 2013 arrived, I’d spent a lot of time in a different kind of environment. The people around me passionately preached strategy, discipline and consistent price management as necessary for success.
I likened my situation to that of Dr. Jekyll. At work I was consistent, disciplined and strategic in my thinking. When I went back to the farm on weekends, I became Mr. Hyde, unable to control my emotions and waking up the next day wondering whether I’d done something terribly wrong.
With the corn price setting records the previous summer due to the worst drought in 50 years, and believing that the approach my dad had been taking for so many years wasn’t the best, I finally put my foot down and convinced him to sell some corn in the winter and spring of 2013. (It’s not easy putting your foot down when you’re working with family.)
I didn’t know for certain whether it was the right decision. But I was confident that the corn price would eventually fall and that $7 a bushel meant a nice profit. While we didn’t sell everything at the highs, we did price most of our production before the massive price drop in summer of 2013, which is exactly when we would have been expecting prices to be at their highest based on what we were hearing from the news and other farmers. In this case, basing decisions on outlook would have proven disastrous.
Even if the price of corn rallied to new highs in the summer of 2013, my goal was to help my family build a strong average price over time and not focus on an individual sale or on capturing the market top.
The way to do that is to become strategic and avoid focusing on price outlook. Pre-plan your decisions, stay disciplined, and know that planning is dynamic. Also, become an expert at using price management tools (forward contracts, puts, calls, fences, etc.). Or hire an expert.
If you decide to manage price on your own, you will need an objective. It ought to be building a strong weighted average price (WAP). WAP is the net average price received for your production, determined over the long term. Calculate it by averaging the value of priced grain per bushel, value of unpriced production assigned the current market value, and the value of any hedge positions.
WAP is a key metric for logically and unemotionally assessing your price management success. If at any time you feel (emotionally) as if you aren’t doing well, calculating your WAP will tell you how well your decisions have performed against the market price.
During the past two years, my dad has become a believer in planning for various price scenarios instead of focusing on market outlook. More than a few times, he’s mentioned how happy he was that we sold as much corn as we did in 2013. As for me, I’m just glad I no longer have a split personality toward the markets.
Scott Stewart is CEO of Stewart-Peterson Inc., a commodity price management 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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