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 email@example.com.