Published on: 17:21PM May 12, 2011
Just a few years ago, the market offered record prices. Another very optimistic time occurred in the mid-1970s. Unfortunately, confidence went south in both cases. Seven-dollar corn dropped to $3, and the ‘70s ended with farmers marching into Washington D.C. behind the steering wheels of their tractors to protest government farm policy.
Will the wave of optimism we’re riding soon crash? Some observers say we have reached a new price plateau, that higher prices are the norm. In other words, they don’t see $3 corn on your horizon.
Others say the opposite and suggest prices could easily drop below the cost of production. They ask: What will sustain higher prices?
For decades, we have heard that demand from developing countries will positively influence price. Yet, the “we are going to run out of food” prediction has always been based on the idea that world population was going to explode, and that the growth would be never-ending. Well, that prediction doesn’t appear to be true anymore. Our bigger problem may be that we are going to see declining populations that could lead to economic hardship.
We cannot talk about commodity prices without using the word ethanol. Ethanol continues to have huge potential. Demand is gigantic, and it is driving our supply-demand balance for corn. However, overnight the government could change the rules, and corn prices could collapse in the blink of an eye.
Producers we’ve spoken with, who have farmed for 30, 40 and 50 years, have voiced uncertainty and uneasiness. While reveling in the price of grains today, they can’t forget severe downturns. They are old enough to have participated in the “Tractorcade” in D.C. Back then, family farm operations were closing at a rapid rate.
Regardless of whether prices sustain a new plateau, you should expect volatility. To draw a parallel to the stock market, the Dow Jones Industrial Average exited the ‘70s below 1,000. Today, a five-figure Dow is the norm. Yet, we experienced several declines along the way, and everyone recalls the Dow’s fiery implosion to the 6500 range in March 2009, a 53-percent loss over an 18-month period.
In commodity markets, there is constant potential for shock. It is difficult to believe we won’t continue to experience severe price swings. Corn and bean charts over the last five years show a growing severity in the distances between high and low prices. These more extreme shifts in price raise the stakes for every marketing decision you make.
If extreme market volatility is a consistently recurring factor in commodity marketing, how can you position yourself to protect what you work so hard to earn? You can—and must— adopt three marketing principles: consistency, strategy and discipline. The goal of these principles is to remove volatility from your revenue stream and provide it with stable cash flow and profitability.
Consistency in farm marketing positions you for success. Inconsistency fuels frustration. Consistent marketers will not hit the top of the market every time. However, they are disciplined and can make good decisions, even when markets are volatile. Why is this so crucial? Because in the commodity business, prices offered by the market over the years tend to average near the average producer’s breakeven. When producers consistently take out of the market as much return as possible within a reasonable risk parameter, they position their operations for long-term success.
Strategic marketers understand that marketing is a marathon, not a sprint. There are no shortcuts that yield long-term success. When you pre-plan marketing strategies and make decisions based on long-term goals rather than on short-term market predictions, you eliminate emotion from your marketing.
Disciplined marketers execute their strategies, as they periodically review them to stay in sync with extremely volatile markets. Disciplined execution positions you to build the best possible average price over time and prevents a desire to swing for the fence.
We don’t know where prices will go from here. We are confident, though, that volatility will continue. So as you enjoy the well-deserved rewards of today, I encourage you to prepare for the many possibilities that come with tomorrow. That way, you won’t look back and think “I woulda, coulda, shoulda.”
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].
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