Tips to take the emotion out of marketing
Raw emotions—typically fear and greed—can interfere with the principles of marketing. Volatility worsens the situation. To help smooth out the ups and downs, keep the following tips in mind when marketing this year’s crop.
Remain Flexible. Today’s attractive prices offer corn and soybean growers an opportunity to lock in a floor for their expected 2012 production. But they need to remain as flexible as possible between now and harvest so they can take advantage of any potential upside, says Brian Basting of Advance Trading in Bloomington, Ill. Purchasing put options as part of an overall mix when pricing this year’s crop is a great strategy. Put options can be used in combination with other strategies, including forward sales or hedge-to-arrive contracts.
For example, a producer might want to utilize a hedge-to-arrive contract on 20% to 30% and put options on the remaining 70% to 80% of anticipated production. The exact mix of strategies will depend on a producer’s risk tolerance.
Understand Your Risk. Once you know your risk, learn how to underwrite or sell options to gather in the premiums, says Jim Bower of Bower Trading in Lafayette, Ind. This strategy has offered his highest percentage of winning trades by far, he adds. At current price levels, producers can be more aggressive because they have cash inventory on hand.
Prepare for Shockers. Be ready to be "shocked" by a report. Have some type of risk management in place prior to the release of a major crop report—especially one that follows an extended price move, either up or down, suggests Ashley Gulke Leavitt of Gulke Group, Chicago. June’s quarterly stocks and planted acreage reports have historically signaled the top in markets.
Likewise, this past December’s World Agricultural Supply and Demand Estimates (WASDE) report was the beginning of the market turnaround. It is often more important to note how a market closes on the day a major report is released than what’s in the report itself. This year’s remaining WASDE reports will be released on April 10, May 10, June 12, July 11, Aug. 10, Sept. 12, Oct. 11, Nov. 9 and Dec. 11. Additional stocks reports will be released on June 29 and Sept. 28.
Pay Attention to Price Spreads. Watch the May–July corn price spread, says Gregg Hunt of Archer Financial Services, Chicago. When the May contract is priced higher than the July contract—which is called an inverted market, indicating tight supplies—it’s a very bullish sign. When the spread inverts, hold off sales. The function of the spread is to go higher to draw out cash movement. When the May contract dips below the July price, the market has done its job and that’s a signal that producers should sell their crop. The last time the May corn contract was priced higher than July—about 20¢ higher—was in 1996, when rationing kept the U.S. from running out of corn.
Stick to a Plan. With volatile markets, producers tend to get oversold. Even though prices look good now, there’s a chance they could run quite a bit higher if the market senses extreme weather conditions during the U.S. growing season, which could be a painful experience for a producer who is oversold, says Kevin Van Trump of Farm Direction, Kansas City. Have a
marketing plan and stick to it. Completing between 30% to 50% of that plan by the time the season starts is prudent advice.