Farmers have heard for years how important it is to have a written marketing plan. It is just as important for your advisory service to have a plan, though that’s not to say it should be set in stone.
This year illustrates why a plan may change, says Scott Harms, who manages Archer Financial Services’ Agricultural Hedge Marketing Program, which trades on the advice of the advisers in our Track Records (see page 64). “In January, one service expected fall prices near $2.80. Now that same service has an upside objective near $625. Because they had a plan and were able to adjust quickly, their hedge program did not suffer and they are in a position to reward what has been an impressive rally,” he says.
“Contrast that to an adviser who sells every little break and buys every little rally—often the result of a hedge program without a plan. This results in a higher number of trades. The cost of this compounds what are likely poor hedging results.”
A useful and common practice is laying out several scenarios using different yield results and demand projections to come up with alternative prices, Harms says. “This allows timely decisions without reacting to the latest rumor to hit the floor of the CBOT.”
Five Questions to Ask Advisers
1. What is your track record? If an adviser can’t provide a documented record of results, it may be cause for concern.
2. How many times did you turn the crop over last year? The 10 advisory services in the Agricultural Hedge Marketing Program turned over the crop 6.5 times on average for the 2009 crop. If your adviser trades much more than that, he needs to have good results to show for it.
3. What is your three- to six-month outlook? Watch the upside objective. As it is approached, expect some hedges from your adviser or an explanation for the inactivity.
4. Do you initiate hedges using stops? In the past, this has been an effective hedging tool, but caution is needed today because of dangerous short-term price swings that are not based on real change.
5. Do you set objectives for hedges and do you take action when they are achieved? When hedges are established, there is no reason why a corresponding objective for protecting hedge profits cannot also be stated.
- November 2010