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July 2011 Archive for Marketing Strategy

RSS By: Scott Stewart, AgWeb.com

Marketing Strategy

The forgotten market factor that cries wolf

Jul 28, 2011

Guest blogger Mike Hogan, manager of Stewart-Peterson's Market360 service, takes a look at the impact quantitative easing, or QE1 and QE2, has had on the markets and assesses what a third round might mean.

You’ve heard the Aesop Fable The Boy Who Cried Wolf. A shepherd boy repeatedly tricks villagers into believing a wolf is attacking his flock of sheep. At a certain point, the villagers stop believing. When a wolf actually does show up, no one rushes to the shepherd’s aid, and the wolf wipes out his flock. Factors influencing market moves are like the shepherd, constantly setting off alarms. You hear them every day: weather, USDA acreage reports, global factors, political bickering over the debt ceiling, the Federal Reserve Bank’s second quantitative easing policy, or "QE2," and so much more.

What do markets do when alarm bells constantly ring? Usually they react, sometimes severely, sometimes without merit. Other times they shrug. You, as a marketer, are left to sort it out.

Let’s look at the quantitative-easing alarm. It doesn’t receive enough credit for moving the market, and it may soon go off.

In the year-long rally we’ve seen in grains and commodities in general, U.S. monetary policy has been an underrated aide. Credit for the rally often goes to decreased yields and increased demand for ethanol. Yet, we have been to these carryout levels before without the $8 price tag. If the dollar were valued at 120 instead of 75, it’s likely our prices would not be as high as they are today.

Looking back to July 2010, when the Fed talked about implementing QE2 to simulate the U.S. economy after QE1 lost efficacy, we saw the market rally substantially. It may even be that QE2 spared us a correction on several commodities – corn, wheat, beans, cotton, precious metals.

Quantitative easing is a Fed tactic that fundamentally weakens the U.S. dollar and thus creates an inflationary environment. A weaker dollar and inflation are bullish for grains.

QE2 ended on the last day of June this summer. We saw a broad-based sell-off during June, likely in anticipation of QE2’s end. (As a note, the normal seasonal on corn usually shows a sell-off on the last half of the month.)

On July 14, Fed Chairman Bernanke sent commodity markets higher during senate testimony on the economy when he said the Fed would act if the economy weakened, read: implement QE3. The very next day, he clarified his comments by saying the time for stimulus hadn’t yet come. Markets immediately corrected.

Would a QE3 be a solid indicator of higher prices? There are a few possible scenarios for you to consider as we all wait for Bernanke’s next QE move.

One, Bernanke is bluffing. The Fed won’t print more money, causing markets to grind lower as sellers look back over their shoulders. Two, the Fed implements QE3, the market loses confidence and a sell-off ensues. The rationale here is if the Fed is compelled to do something, the markets will conclude the economy really is weak and wonder, if QE1 and QE2 weren’t enough to start a sustained recovery, why would QE3 be any different? Three, we get QE 3, the market gains confidence and commodities go higher.

It’s difficult to say which, if any, of these scenarios will play out. I wouldn’t assume a third stimulus would have the same effect as the first two. The key point here is to remember there’s no way to know, which makes planning for all possible scenarios critically important. That way, if cries of "wolf" sound, you won’t be tricked and find yourself on the wrong side of the market.

 

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.

The No. 1 danger to your marketing – plus three tips for prevention.

Jul 14, 2011

It’s been said the wolf is always at the door. He sits, waiting for bad times and a chance to blow the door down. Right now, times are good. Your profits may be better than ever. As such, it’s easy to pay less attention to the wolf.

 

That’s precisely what he’s hoping you’ll do. Apathy is his ally and the biggest danger to your marketing. Right now, apathy is in growth mode.

 

When grain prices break into new highs and seemingly can do little wrong, do you pay less attention to your marketing? Ironically, market risk is at its highest during those times. It may not seem that way. After all, what’s risky about positive news on top of rising prices?

 

Think of grain markets in 2008, the early-2000s housing boom, the late ‘90s dotcom boom. Many people assumed in all cases prices would continue climbing higher and eventually were caught off guard.

 

You don’t need to get blindsided by the market. There are steps you can take to capture opportunities that exist today, position for tomorrow’s opportunities, and protect against downside risk.

 

Before I elaborate, allow me to say that corn certainly could go much higher from here. If you read my recent report, which offers a futuristic look at U.S. agriculture and the world, you know why corn could reach $10.40 on the low side and $11.20 for nearby futures. In an extreme move, it could go much higher before plummeting. Just think of the ramifications such high prices would have on land rents and inputs! Click here to get a copy of the report.

 

My point is simply that you must always be prepared for whatever the market might do. Nobody knows when the wolf will make his presence unavoidable.

 

Here are three tips for preventing apathy.

 

1.)    Plan ahead.

Ironically, when you plan ahead, you can pay a little less attention to the wolf at the door because you’re prepared. Develop strategies based on your farm’s financial position and your risk tolerance. Make decisions in advance. Every decision you make is important. Look at how each one helps you build a strong weighted average price, also known as the value of your priced bushels, un-priced bushels assigned the current market value, and hedge positions. While it’s never too late to start approaching your marketing this way, the longer you wait the more costly marketing can become.

 

2.)    Take action.

If your tractor’s running rough, you probably don’t wait too long before doing something about it. Marketing is similar in that you have to take action. Now is a good time. If you haven’t made any sales lately, you’re now in a rewarding position. You could forward contract and purchase puts on non-contracted bushels. With puts, you can capture upside potential. Also consider call options against forward sales in case the forecasted dry, hot weather appears and sends prices higher. The danger in waiting is not knowing what’s over the horizon.

 

If you have strategies in place and have been selling incrementally, congratulations. You’re capturing opportunity and managing risk.

 

3.)    Be consistent.

We recently saw futures plummet. Sudden drops tend to cause apathy, the kind born of frustration rather than of rising prices. Consistency in farm marketing positions you for success. If you market consistently, you may not hit the top of the market. You will, however, be positioned against the killer loss. You’ll also become disciplined and able to make good decisions even when markets are volatile. Best of all, you’ll avoid the dangers of apathy.

 

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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