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March 2011 Archive for Marketing Strategy

RSS By: Scott Stewart, AgWeb.com

Marketing Strategy

Will Independent Family Farms Survive?

Mar 20, 2011

At the Professional Dairy Producers of Wisconsin Business Conference last week, one of the speakers, Linda Wenck, presented research from the Illinois Farm Bureau about consumer perceptions of farmers. The Stewart-Peterson staff who came back from that event were fascinated by the research. They brought the info to me because they knew about my passion for helping American farmers maintain their independence and ability to keep their farms in their families, as opposed to selling out to foreign buyers or big corporations. I wrote about it in my latest white paper, “Heads Up: A Futuristic View of U.S. Agriculture and the World, and What You Can Do to Protect Your Prosperity.”

As we move forward, the global demand for agricultural commodities could continue at a rate that leads to very attractive levels of profitability for agricultural producers. In fact, unprecedented levels of profitability. We are seeing it today: $5 and $6 corn prices are almost becoming common.  With high prices come big price swings. Extreme volatility in the future will most certainly cause widespread pain and put many producers out of business. As we begin losing producers to these wild market swings, we’ll see those who survive emerge stronger, increase in size, and continue the acceleration toward a landscape with fewer, larger farms.
 
This consolidation of farms could bring about massive structural changes in agriculture that could have significant impacts on our economy. What happens when outside investors buy agricultural land? A dramatic shift, in that many producers will no longer be farming ground that they own. Instead, they will be custom-farming ground for big corporations. It will almost be like a landscape firm descending on a community with their lawnmowers, driving around on the yards and cutting the grass, packing up the equipment, and driving back to their home base at the end of the day.
 
Under this scenario, farmers would own the machinery and provide the labor; however, they wouldn’t control the land and wouldn’t control the commodity that they are producing. The farmer would work on a margin for labor and a machinery investment, and not benefit from the widely profitable prices. Farmers may be forced to competitively bid for work, possibly online, in reverse auctions. In other words, farmers’ efforts and machinery would boil down to being commoditized. This is an extreme thought; however, when you think about just how good most producers are at growing corn and other commodities, it is not beyond comprehension. Vertical integration has already occurred in some sectors of agriculture.
 
The impact of farm ownership changes in rural America will be extreme. As farm size grows dramatically, and/or farms are taken over by outside investors, what need is there for local businesses to support local farmers? Machinery will be bought direct through large buying groups, or through massive corporate purchases. Fertilizers and other supplies will be delivered direct in large quantities, and not filled through local suppliers. Financing will not come from the local bank. It will be tied in and financed through the large corporations. In this scenario, all the money inflow and outflow that occurs, and the volume and velocity of dollars that flow through rural communities, dries up. The bank owners and local businessmen that served on the boards of directors of the hospital and the school will no longer be needed in the community. When they die, they won’t have piles of money to donate for a new wing on the hospital, a new library, or to replace the carpet in the church. All that money would go to some rich stockholder, possibly one from a foreign country. This trend has already begun.              
 
Now, let’s tie this to what the Illinois Farm Bureau research says about consumers’ perceptions of agriculture: Wenck said consumers generally like farmers, but they dislike anything related to a corporate farm, or the idea of an absentee owner running the farm from outside the community. This leads me to wonder if the loss of independent farm ownership is likely to cause a consumer backlash that will result in falling demand for products that are heavily dependent upon consumer choice—products like beef, pork and dairy. If we have consumer concern now, when 98 percent of U.S. farms are family owned (according to the American Farm Bureau), what will consumer perceptions of agriculture be when that number is much lower?
 
I realize that my futuristic look at agriculture and rural community life may seem bleak, but it is a realistic view of what can occur. We’ve already started to see this occur as the number of farms has decreased in the U.S. It will only be more dramatic as ownership continues to change.
 
What can your response be? Prevent the extreme from happening. Make money. Make lots of money. Remain competitive and independent. The downfall of rural America is only going occur if farmer producers across this country do not maximize their profitability, take advantage of record prices when they occur, and make record profits. Those who leave money on the table are leaving opportunity on the table, and ultimately are opening the door for that opportunity to be snatched up by others. The most important thing all producers in the United States can do to control their own destiny is maximize their own profitability and their own financial strength.That is what Americans do best, and that is what American farmers have to do if they want to survive, thrive, and help America and American agriculture remain strong.
 
The research shows that consumers connect with individual farmers and farm families. Let’s keep our farms strong by using all the tools available to us to survive the market volatility that is in our future.
 
I will be happy to send a copy of my white paper to my readers. Simply call me at 800-334-9779 and I will send one to you. Or you can request a copy at www.stewart-peterson.com.
 
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 scotts@stewart-peterson.com.
 
The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Neither the information presented, nor any opinions expressed constitute a solicitation of the purchase or sale of any commodity. Those individuals acting on this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report.  Futures trading involves risk of loss and should be carefully considered before investing.  Past performance may not be indicative of future results. Any reproduction, republication or other use of the information and thoughts expressed herein, without the express written permission of Stewart-Peterson Inc., is strictly prohibited. Copyright 2011 Stewart-Peterson Inc. All rights reserved.

Know your tools in your toolbox

Mar 17, 2011

Through my recent travels and various speaking engagements, I've talked with a number of different farmers and heard that some commodity marketing advisors have been recommending approaching the grain markets (corn, soybeans, wheat) with strategies such as fences or collars. A fence and a collar are the same strategy. Basically, what you're doing is buying a put option to protect against the decline in market prices while selling an out-of-the-money call option to collect premium to help pay for the put. An out-of-the-money call option is an option that is above the current market price. A more aggressive approach of this strategy is where you buy one put and sell more than one out-of-the-money call. That way you can buy the put closer to where the current market is and sell the out-of-the-money calls for a small investment or possibly potentially even a credit.

 
If you pick a top or get into one of these strategies in a declining market that continues to decline, they are a great tool. You'll feel real smart and everything will go wonderfully. However, you should always be aware of the risks using the tools in your approach. In a fence strategy where you're selling two calls, you can get buried big time if the trend continues higher. Even a fence strategy where you're selling only one call can generate margins on the call that can amount to more than most any farmer will want to stomach. Let me give you a little math. Perhaps this is a bit extreme, yet it makes the point.
 
Let's say you do a fence on corn around the $6.00 area. In this example, you sell two $6.50 calls. Summer brings hot and dry weather, everyone gets fearful that we will not get a good crop and that we will run out of ending stocks. Corn shoots up just past the previous highs and hits $8.50. Those two sold calls lose $5,000 each. That's $2.00 per bushel, or $10,000 per trade. If you did them at $6.50, you'd be looking at $4.50 corn. What do you think the cost of production would be if corn is at $8.50? How would you like to be selling your corn in the low $4s when your neighbors are selling their corn in the $6s, $7s and $8s? This is not a pretty picture.
 
I'm not saying you shouldn't use a fence. I am saying to do so wisely. If you are looking at doing a fence, I suggest you be a bit more conservative and do a one-to-one; buy one put and sell one call. And then layer in an out-of-the-money bought call option against the sold call. So let's say you're selling a $6.50 call. Perhaps buy a $7.00 call as a hedge against the sold option. It's not perfect, though it can keep you from getting buried.
 
As an alternative, consider a ratio put spread. In a ratio put spread, you sell a put that is closer to at-the-money and buy multiple out-of-the-money puts. It's a fixed-risk strategy. You know the costs and risks right upfront. Risk is fixed to a range. Maximum risk occurs if futures (at expiration) end at the bought put's strike price. This position provides for high leverage, and if prices move lower you have the potential of multiple long puts working in your favor.  In today's volatile markets, those are really nice features.
 
I am writing this only to alert you to some of the risks involved in some of the strategies that are being suggested. Some of these strategies were recommended near the most recent top of the market, and today they look pretty good. If you're in them, my suggestion is to use the most recent price break to buy back your sold call or to buy that out-of-the-money call against it to limit your risk. Fixed risk strategies are a big plus when there are nuclear meltdowns, massive political unrest globally and the threats of all sorts of natural disasters looming.
 
One of the first and most important rules I have with marketing is to avoid doing anything stupid. Another way to say this is to do no harm. You want to make marketing moves that will keep you out of trouble and will help you, and if you're wrong, they will hurt you only a little. Don't make marketing moves that can hurt you substantially. They call it risk management for a reason.
 
I also believe that a big part of marketing in this day and age is opportunity management. You have to balance the opportunities and the risks. Just be sure you understand the risks and the opportunities of the tools that you're using. If you don't understand them, don't use them.
 
I always say to either be an expert or hire and expert. In these volatile times, there is little middle ground there. There is massive opportunity, and there can also be massive risk. Don't let it scare you away. You cannot turn your back on it. You have to face it. Face it armed with knowledge and respect. I wish you well. May your marketing be successful.
 
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 scotts@stewart-peterson.com.
 
The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Neither the information presented, nor any opinions expressed constitute a solicitation of the purchase or sale of any commodity. Those individuals acting on this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report.  Futures trading involves risk of loss and should be carefully considered before investing.  Past performance may not be indicative of future results. Any reproduction, republication or other use of the information and thoughts expressed herein, without the express written permission of Stewart-Peterson Inc., is strictly prohibited. Copyright 2011 Stewart-Peterson Inc. All rights reserved.

Swimming Upstream

Mar 16, 2011

As the U.S. and world economies work to recover from the burst economic bubble in 2008, I'm starting to feel like obstacles are mounting to challenge the recovery. It's not that we won't recover; it's just that, day by day, it’s getting to be more of an uphill battle.

 
One of the first challenges the U.S. and other countries face going forward is a disenchanted generation of baby boomers. When so much money was poured into the economy to try and rescue the banking system, boomers became almost instantly aware that government debt was escalating to extraordinary levels and that higher taxes were almost inevitable. On top of this, after the new administration's comments that it was going to tax and then tax more those who work hard, take risks and provide jobs, I saw many business owners becoming very disillusioned.
 
Look at, for instance, a 50-something or 60-something baby boomer who has worked an entire career to build a business, taken all kinds of risks and dealt with all sorts of hassles. Then, in a matter of months, 40% or 60% of net worth disappears in stock market and real estate values. Next, the government announces that to fix the economic malaise it is going to tax those boomers and take money away from them at every turn. Many business owners have said enough is enough. I'm just going to hunker down, protect what I've got, take less risk and look to get out rather than build up what I have.
 
This kind of a reaction is common. Any time there is uncertainty, people tend to retreat and be cautious.
 
Other factors have developed that will make the economic recovery slower and possibly more sporadic than it otherwise might have been. One of them is the export of jobs. To give you a stark example, I know a locally owned business that had 6,000 employees. When the economy collapsed, it eliminated nearly 2,500 jobs by either moving them overseas or laying people off permanently. As the economy has been recovering, all its rehiring has taken place in overseas plants. The labor is cheaper and overhead costs are lower. This type of approach is widespread. Many businesses across the land have found they can do a lot less business with a lot fewer employees and still make very good money. These businesses have learned that employees are expensive. Their business goals are to rebuild with a minimum amount of rehiring.
 
World events are another major factor that have reared their ugly heads in recent weeks. The uncertainty of these world events will certainly cause nearly everyone globally to reevaluate their lives. When you see massive unrest in the Middle East that could, on one hand, lead to democracy there, yet, on the other hand, could lead to radical foreign governments that are far less stable and less friendly than those that they replaced, it's worrisome. The associated spike in oil prices has many concerned about escalating commodity prices and a skyrocketing cost of living. The earthquake and tsunami in Japan, and now the forecast that the next major quake may very well happen on our western coast, have to shake confidence in personal security for many people. On top of that is the ongoing nuclear meltdown in Japan.
 
When you step back and look at all these events, you have to realize that, in these times of great uncertainty, people question their values. They step back and decide that family is very important. They step back and decide that work is less important. They step back and decide that they want to enjoy life while they can. And they step back and realize that they cannot spend every penny they've got like there's no tomorrow. They need to be conservative and prepared for the unexpected. All of these things lead to less spending, less productivity, less risk taking and less economic activity.
 
My point is not to say that our economy is doomed or to even say that the economic recovery won't continue. I just think it is important for people to realize that, in times like we're facing today, an economic recovery can occur, though it will have a bit of a brake dragging it down. When setbacks do occur along the way, they will be a little bit deeper and possibly a little bit sharper than they otherwise would have been. The recovery time window may not be as quite as long as it otherwise would have been. And when the really big setbacks occur, they could be even bigger, even deeper and more severe than they otherwise would have been.
 
As with much of what I write about, the key point to take away from here is that volatility in the marketplace is going to continue and uncertainty seems to be growing even greater by the moment. Face it: Who can predict next earthquake, the next tsunami, or the next country to erupt in violent protests and experience economic and infrastructure meltdown due to lack of a central government?
 

We're living in uncertain times. The only certainty that you can count on is continued uncertainty and volatility. The only sensible reaction to that is to be prepared. Prepare for the unexpected, and rely less on an outlook and more on your preparation. As we like to say, don't focus on where the market may go. Instead, position yourself for whatever the market may do.

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 scotts@stewart-peterson.com.
The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Neither the information presented, nor any opinions expressed constitute a solicitation of the purchase or sale of any commodity. Those individuals acting on this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report.  Futures trading involves risk of loss and should be carefully considered before investing.  Past performance may not be indicative of future results. Any reproduction, republication or other use of the information and thoughts expressed herein, without the express written permission of Stewart-Peterson Inc., is strictly prohibited. Copyright 2010 Stewart-Peterson Inc. All rights reserved.

What's ahead for the U.S. economy?

Mar 10, 2011

This blog has been excerpted from a new white paper I wrote titled “Heads Up: A Futuristic View of American Agriculture and the World, and What You Can Do to Protect Your Prosperity.” If you would like a free copy of the 20-page paper, please request it at www.stewart-peterson.com.

The economic forecasting business is a risky one. Thus, my intention here is not to predict what will happen down the road. Rather, this is a look at the very real potential for dramatic events, how you might be affected by them, and what you can do to protect yourself.

On any given day, you can find some economist or expert forecasting that economic calamity is just around the corner, and just as easily you can find an expert saying that the bottom is in, the trends are up and that better days are immediately ahead. For certain, we live in an uncertain world. The economic leading indicators that I follow indicate that we are on fairly solid footing, and that at least for the next couple years, we should see improvement. In the big picture, though, my fear is if the federal government doesn't learn to spend less, economic calamity does lie ahead. It may be 10 years off, it may be 25 years off, yet for sure, overspending will catch up with us and lead to high inflation and high interest rates that ultimately are only cured by a severe economic downturn. The only fix for this that I can see is stopping runaway federal spending.
 
What is highly likely for the next decade or so is a slow recovery with more dips than we’ve typically seen. Some will be deeper than they would have otherwise been had we not had such a devastating blow in 2008. There is evidence that supports the likeliness of this new “roller coaster-like” economy: Unemployment levels are likely to remain high because employers have found that they can do more with less people, and that people are more expensive than equipment.
 
For example, Caterpillar hired 15,000 people in 2010, half of them overseas. A friend of mine who owns a manufacturing business with 6,000 employees had to lay off 2,500 during the recession and has only rehired at overseas, lower-cost production facilities. The jobs lost were high-paying union jobs. Those who lost their jobs will be hard-pressed to find jobs that pay half as much. These trends in the way companies hire and compensate employees point to less disposable income for American workers than we’ve seen in previous, prosperous decades.
 
When you combine the most recent economic collapse and the money spent to come out of it, the sluggish recovery, and all the other new spending, one thing seems clear: The U.S. economy is slowly headed toward insolvency.
 
Our nation's interest costs are going to consume such a large part of our annual income that, for all practical purposes, we will go broke. The evidence for this is right in front of us: Greece, Ireland, and a long list of other countries that are in the same situation. Under this scenario, it is hard to predict anything other than extremely higher interest rates and potential hyperinflation. I hope these trends change and this forecast proves wrong. Rates may not go up, or may do so only moderately for two or three years, as long as the Fed continues to stimulate the economy. (In fact, rates could go down to almost zero before the bottom is in.) However, once they start to climb, more than likely, the increase in rates will be geometric rather than arithmetic, as was the case in countries such as Brazil, Argentina and Nicaragua. Ten years from now, I suspect rates will be up to 7 or 8 percent. In the window of 10 to 20 years, rates could easily be into the teens, and I wouldn’t rule out rates over 20 percent like we saw in the 1970s. Some extremists would predict much, much higher rates. I’m not taking that extreme of a view. Yet.
 
Escalating interest rates and inflation ultimately lead to economic collapses. The Institute for Trend Research is predicting an economic collapse that could occur 20 years from now. Most likely that downturn would be deeper than the one we most recently suffered through, and hopefully not as severe as 1929. Admittedly, that is more than just a little scary.
 
Wild price volatility for commodities, followed by economic collapse—if this occurs, your approach to everything you do may have to change dramatically. My belief is that, in this environment, preservation of wealth will become more important than trying to accumulate wealth. If you have a large asset base in a substantial economic downturn, that asset base can be wiped out and become a small percentage of its previous self. More importantly, if you have debt when interest rates spiral substantially higher, you can be destroyed by that debt.
 
As a result, one of the most important things Americans need to do in the decade ahead is to get out of debt. I don’t mean reduce it; I mean eliminate it. Borrowing money at 20 percent or 30 percent is insane. Admittedly, if there is 20 percent inflation at the same time, it is like you are borrowing the money for free; however, it's risky. First, even if your assets are increasing, can you cash-flow the payments? Second, when everything falls apart, you end up owing a lot of money on assets that are nearly worthless. That’s when the banks and the financiers end up with all of the assets.
 
Other ramifications of this inflationary environment would be a substantially weaker U.S. dollar. However, “weaker” is a term that is relative to other currencies in the world. The European economies are likely to continue to be weaker than the U.S. economy under almost every scenario. More importantly, the U.S. dollar will likely be weak against key trading partners such as China and India, and possibly emerging South American and Asian economies.
 
Remember, though, a forecast is not necessarily our destiny. Hopefully, clearer heads and smarter minds will prevail and change our government spending to derail the disastrous path we are on. We need to remember that the principles of individual liberty and capitalism are what made America strong, and will continue to provide strength.
 
What do you think about the path our country is on, and do you ever wonder how you could be affected? I welcome your comments.

 

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 scotts@stewart-peterson.com.
The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Neither the information presented, nor any opinions expressed constitute a solicitation of the purchase or sale of any commodity. Those individuals acting on this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report.  Futures trading involves risk of loss and should be carefully considered before investing.  Past performance may not be indicative of future results. Any reproduction, republication or other use of the information and thoughts expressed herein, without the express written permission of Stewart-Peterson Inc., is strictly prohibited. Copyright 2011 Stewart-Peterson Inc. All rights reserved.
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