Price Trap

November 2, 2010 08:36 AM
Price Trap

When Doug Rupp reaches his target goal for a grain sale, he pulls the proverbial trigger and locks in his profits.

There is no hesitation or second-guessing for the Stryker, Ohio, corn-and-soybean farmer. “When profit potential is good enough to accomplish what Doug wants to accomplish, he’s selling, period,” says Chip Flory, publisher of Pro Farmer and Rupp’s marketing adviser for the Ultimate Farm Quest program.

In fact, when Rupp determines post-sale that the market is moving up, he takes advantage of that opportunity as well. “If I’m mad at myself after a sale, that tells me it’s probably a good time to sell again and lock in those higher margins for the following year’s crop,” he says.

Establish Destination. Flory says goal-based marketing works well for Rupp because he views a grain sale as the vehicle to take him from point A to point B in his business plan. Rupp wants to grow his 2,000-acre farm, so when the market provides a high enough net return per acre, he moves. “When I can make historically high margins, I’m willing to do that no matter what I might leave on the table,” he says.

That philosophy has served Rupp well for the past 30 years. But given today’s market outlook, he may be leaving too much money on the table, Flory says. Rupp agrees.

Flory wants Rupp to try a trap strategy for the remainder of his 2011 crop. A trap strategy works only when markets are in an uptrend, and it attempts to concentrate sales at a higher price level.
Flory says that instead of a simple scale-up approach to marketing, the trap strategy works like a trailing stop in a long futures position.

“We identify the first line of support and a secondary line of support in the futures contract to establish the trap strategy,” explains Flory, who developed this marketing concept with other Pro Farmer staff. “If the first line of support is tripped, we make a 10% sale,” he adds.

The secondary line of support becomes the proverbial line in the sand—the point that will confirm a trend change in the market. If that level is broken before the rally restarts, Flory says, Rupp should get more aggressive with cash sales.

Flory adds, “If the trend change is a head fake, we can always reopen upside price potential with a call option or long futures position.”

However, if the rally continues, a new trap is set at higher levels. The previous trap becomes the secondary line of support—the level that, if broken, would trigger aggressive sales.

“It’s our Plan B if a rally quickly runs out of steam,” Flory explains.

Here’s how the trap strategy can concentrate sales at a higher price:

If the first trap triggers a 10% cash sale, the second trap triggers a 15% sale (the 10% you would have sold at the first trap plus 5%). The third trap triggers a 20% sale (10% from the first trap, 5% from the second trap, plus 5% at the third trap).

The ultimate goal is to ratchet up the trap level, so that when the primary trap is tripped, you can make a very bold sale (up to 100% of what you’re willing to sell).

“This strategy will not sell the high, but concentrates sales at higher levels,” Flory says. “Doug is in position to execute this strategy on his remaining 2011-crop corn and on 2012-crop corn as well.” n

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