Knowing your average carries a lot of weight
Aug 19, 2010
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 email@example.com.
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Recent market volatility showed us once again that when it comes to marketing, it’s crucial to expect the unexpected. It's also imperative to be prepared to capture opportunity and protect against risk. Corn recently rallied. How would you have reacted if it had rallied higher or turned bearish? One way you can position yourself to make the best possible decisions on when to price is to know the weighted average of your entire crop.
Your entire crop means the average of your combined cash/sold price, whatever you have hedged, and your un-priced bushels that are valued at the current market price. Knowing the average of your entire crop will help you determine which marketing tools to consider as you work toward trying to achieve a strong weighted average price. It’s also important to know how your weighted average price changes as the market price changes.
From a technical and fundamental standpoint, corn doesn’t appear to be ready to double the way wheat did. If corn were to do what wheat did, it would likely first need to get over a technical hurdle of $4.38. Then, it would need to get over $4.51 for the charts to show the potential for $5.50, putting it in line with wheat, relatively speaking.
On the flipside, we could continue on a path of setting a series of lower highs and lower lows from the 2008 high point. If this takes hold, we could end up closer to $3.00 this fall. This is more likely if, for example, yields come in on the high side and the recent USDA report falls short due to a faltering global economy.
So, what are you supposed to do?
Well, if there is a potential to see anything between $3.00 and $5.50 corn yet this marketing year, you’ll want to be prepared. If you’re light on sales, now might be a good time to start catching up. If you’re heavier on sales, ask yourself if you know what you’ll do if corn does breach $4.38. It’s possible that China could continue to make purchases. Are you prepared to re-own crop if corn were to go to $4.38? How much would you own? Why? You can fill in the blanks more easily after you’ve determined your average and you know where you stand.
Ultimately, great marketing focuses on minimizing the separation between your average price and the market price during a bull market and maximizing the separation between your average price and the market during a bear market. We’re not expecting corn at $5.50 and trying to hit the top. Rather, we’re leaving open the possibility for $5.50—or better—and planning to help you take as much profit off the table as possible within a reasonable risk parameter. We also don’t know if corn will drop to $3.00. But if it does, our goal would be to have your weighted average as far above that figure as possible.
Nobody can consistently predict where the price will go. That’s why we recommend that you prepare for whatever the market might do. Knowing the weighted average price for your entire crop will help you.