Mortal Sins of Marketing

December 4, 2008 08:10 AM

There's no single path to sales heaven, but you'll multiply your chances of achieving peace if you don't succumb to the common price-killing "sins" identified by the marketing advisers we track, who work closely with farmers.

As with religion's seven deadly sins, among the most dangerous is greed. "Greed was in full bloom at the peak of the flood rally in June," says Dale Durchholz of AgriVisor in Bloomington, Ill. "Instead of pricing a portion of their crop, many producers were convinced prices were going higher yet. We heard of some wanting to buy calls or buy out of contracts at levels that were considered profitable when they were made."

Greed also is behind placing standing orders to sell at higher prices and then cancelling those orders once the market gets close, says Bryan Doherty of Stewart-Peterson Group in West Bend, Wis. "We saw many orders that were cancelled that would have provided significant return on investment." This move is OK if there is a back-up plan, such as a trailing stop under the market, he adds.

Ignoring basics. Most of the sins the advisers cite relate to textbook marketing plan development and execution. They include:

• Not knowing your break-even. "This means you can't make informed marketing decisions," says Richard Brock of Brock and Associates in Milwaukee, Wis. "You are running a major business. Don't roll the dice on your entire production."

• Locking in input prices such as rent, fertilizer, seed and fuel, without locking in output, leaving your margin at risk. "The past two years, it paid to buy inputs early and sell grain late," Brock says. "This likely will not work at all this year."

• Not having a plan. "Without a plan, you don't have a road map to guide your decisions," Durchholz says.

• Not setting objectives. "Prior to the growing season, it's wise to assume a normal year, look at supply/demand and set reasonable price ranges for excellent, average and poor weather," says Dan Manternach of Doane Agricultural Services in St. Louis. "Then you can evaluate prices at any time with regard to downside risk and upside potential."

• Basing this year's marketing decisions on what worked or didn't work last year. "Markets are rarely the same two years in a row," Brock says. "This one will be totally different!"

• Marketing based on the view out your back window. "The market is thinking nationally or even globally," points out Scott Harms, with Archer Financial in Chicago, who tracks the advisers.

• Not looking beyond your local grain buyer can be a mistake as well, Durchholz says. "Lucrative short-term marketing opportunities can quickly develop if an end user or an industry is caught without adequate supplies. Check discounts as well as basis."

• Waiting for the top. "This is a disastrous practice because you can only spot the top in the rearview mirror," Manternach says. "It is better to sell in increments into a rising market. That way, you have high odds you'll sell some near the top."

• Scaling sales the wrong way. "If you expect prices to rise, sell a small portion at your first price objective, then bigger and bigger portions," Manter-nach advises. "If prices are falling, sell a bigger chunk at the top and smaller amounts at lower levels."

• A related error is thinking that because the market has fallen, it can't go any further. "If you are reluctant to hedge after a sell-off, be defensive and place a small hedge or buy put options," Harms suggests.

• Exiting the market without a plan to get back in. Before you get out, "decide what will cause you to re-establish protection," Harms urges.

Spurning sales tools. "You shouldn't avoid futures and options when prices are volatile and margin requirements are high," Brock says. "For many producers, these will still be some of the best tools available over the next few months."

"That's especially true when commercials stop buying, as they did this year," Durchholz adds.

And producers have advantages: "Unlike speculators, when a farmer sells a call option, he's covered on the risk of loss if prices keep rising because the value of his crop rises," Manternach says. "Even if the call is exercised by the buyer and you wind up with a short position in futures, it can be considered a hedge."

Similarly, there are price enhancement opportunities in selling put options against crop already priced when prices are near your "worst case" objectives, he says. "Even if prices drop, the buyer exercises the put and you get the long in futures, it's at a place where you may want to reown what you sold at higher prices."

Failure to finance marketing. "If you don't work to line up adequate margin money if prices keep rising after you hedge, you may be forced out of the hedge just as markets top and drop like a rock," Manternach says. "It's like paying premiums for house insurance and dropping the policy as the tornado sirens are going off."

Failing to manage opportunity risk. At any given time, you have a price risk on 100% of production, no matter how much is sold. "You always have downside risk on unpriced production, but you also have the risk of missed opportunity if prices rise on what you have sold," Manternach says. "There are ways to manage both of those kinds of risks using futures and options."

Adviser strategy. Another category of mistake relates to how you use market advisers.

• Paralysis by analysis. By reading too much, you can find yourself confused about what to do. It's better to rely on a few sources you trust.

• Backseat driving. Once you identify those sources, use them. "I hate it when a client skips a sale at $7 because they are sure we're going to $10. Then I'll get a call at $5 asking me what to do now," says Dan Basse of AgResource in Chicago.

We hope this article helps you identify and avoid potential detours in your marketing journey!

Farmers confess the errors of their ways

When asked what mistakes they think they make in marketing or in using advisers, our readers gave the following sampling of responses to an October survey. For more charts on how they rated common mistakes, click here.

• "Getting too busy to follow through with advice."

• "Second-guessing my advisers."

• "I let greed get in my way."

• "I didn't sell when the market was at or near the top."

• "Listening to conflicting reports/advice. More and more, I believe I need to sell/contract when prices are in top 1/3 and tune out those saying it will go higher."

• "Selling too much too early or not enough preharvest."

• "Thinking that because advisers follow the market full time, they have a crystal ball. Sometimes a little down-to-earth common sense pays dividends."

• "I don't listen to my advisers."

• "I do listen to them."

• "I'm not aggressive enough."

To contact Linda H. Smith, e-mail

Top Producer, December 2008

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