Sell and Defend When Markets Offer Value

Published on: 10:16AM Jan 11, 2010
In one of my recent blogs I talked about the current corn price being a Christmas gift. That remains true. A recent analysis by ADM Investor Services shows that the current markets have corn priced about $1.00 over what supply and demand fundamentals say it should be. Likewise, soybeans are about $3.00 over what a typical fundamental analysis shows.
In the old days, we used to be able to look at supply and demand and carryover stocks to come up with a basic fundamental analysis and a reasonable price for commodities. What is “reasonable” anymore? Investment fund buyers, wacky weather and an explosion of information out there about what markets might do makes fundamental analysis only one part of a constantly shifting situation.
What’s a marketer to do?
  1. Recognize value. Corn is at a good value right now. Sure, input costs have gone up, but current prices are still a good value when you plot them on a historical chart.
  2. Weigh probabilities. When prices are sitting at a level that is higher than what the fundamentals say they should be, there is a far greater risk of prices going down from those levels than going up. You need to determine how much risk there is that prices will go down, and how much they might go down if they do. Then you engage in scenario planning (as I’ve described in previous blog posts). Know what you will do in each possible price scenario, and what triggers you will use to enact your strategies.  
  3. Sell and defend. When you look at historical prices and see good value in today’s prices, you generally want to sell. Sure, we can have a run-up in prices due to a weather event next year, so defend yourself against this probability with reownership strategies.
The psychology of it all
There’s a reason for my recommending sell and defend in this situation, and it has to do with human nature.
I’ll tell you what I see all the time: Farmers tend to be slower to react in a bear market than they are in a bull market. If the price climbs up a dollar and you are slow to react, you may miss a high, but you can still sell at levels that offer some value. But if the price starts dropping and you are slow to react, you can take a killer loss. We see this all the time when prices start dropping—the farmer tends to think it won’t continue to drop, or they want to wait for the price to go back up a little before they act. For these reasons, based on hope and emotion, they are slower to sell in the bear market.
This tendency—being slower to react to a bear market--is why I usually recommend sell and defend when the markets are offering value. This strategy guards against the killer loss, yet leaves you open to opportunity.
It’s worth saying again: You can shorten your reaction time for making these decisions by thinking about your strategies in advance, something I’ve described in earlier posts as “market scenario planning.” If you envision all the possible price scenarios, know what you’ll do in each scenario, and know what trigger points you’ll use, you can avoid second-guessing, avoid reacting too slowly, and make decisions with more confidence. 
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 [email protected].