Market Mania

September 30, 2011 01:21 PM
Market Mania

Use a variety of financial tools to keep marketing jitters in check

Market volatility is nothing new to farmers, but the recent roller-coaster ups and downs would test even Superman’s nerves of steel.

"You’re not going to be able to completely control your emotions in the market we’re in right now or in the one we have coming in the next couple of years," explains Chip Flory, Pro Farmer editor and publisher.

It’s easy to understand how the market drama can trigger such an emotional reaction when you figure the money at stake. "On a 1,000-acre operation producing 200,000 bu. of corn, a $5 swing means there’s $1 million between the top of the market and the bottom," says Farm Journal economist Bob Utterback.

Utterback hopes the volatility will encourage farmers to develop a plan to deal with the markets in a way that enables them to make money more often than not.

Deciding on marketing price targets and realistic returns on investment are good first steps, Utterback says.

Setting goals that maximize total revenue per acre can also help, Flory adds. "That seems like an obvious goal, but some long-standing and conservative marketing plans don’t maximize revenue," he explains.

Quincy, Mich., farmer Leon Knirk participates in a monthly marketing discussion group, Grain Growers, to sharpen his marketing skills.

"Participating in that group has made me more aware of my marketing plan," Knirk says. "Talking to other guys who’ve marketed for 30 to 40 years gives me some good perspective that I don’t get anyplace else."

Flory contends that the best way for farmers to minimize the emotional aspects of marketing is to be satisfied with how they market their cash grain.

"During the past 10 years, you would’ve been happy to settle for a 10% return. We’re at 20% now, so sell something," Flory says.

Flory acknowledges that his recommendations are easier said than done.

"High emotions are typically tied to high risk, which is typically tied to high opportunity," he notes. "Being emotional about your marketing is not necessarily a bad thing. It means you’re dealing with new opportunities, and that’s a good thing."

Utterback says his most successful customers are always looking to sell. "Their mindset is, ‘How am I going to pull the trigger?’" he says.

Another way to manage the amount of risk you shoulder is to use futures and options. For instance, Flory says, "just having an open account automatically gives you more flexibility and means you have the tools in place to manage risk. If you manage your risk, you manage your emotions."

Knirk says his group monitors outside markets and discusses how to handle the black swan events that cause chaos. "Crude may have dropped $3, or maybe it’s politics, so corn is down, too," he says. "You have to be prepared to deal with the black swans."

Strategic tips. Utterback offers three suggestions to help establish a marketing strategy that can make pulling the trigger easier and soothe frayed nerves:

1. Determine what you want from the market. Set profit goals; put them in writing to reference and update.

2. Establish a personal style. "Are you a cash seller or a long-put trader? Understand the advantages and disadvantages of each marketing approach, and determine which ones you want to use," Utterback says.

3. Develop a marketing process. "You need a set of decision-making tools, which might include working with an adviser or tapping into financial reports," Utterback says. "The emotional control comes from the tools and the process you use."

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