You’re likely never happy when prices for your production fall. Last week, I wrote how even rising prices make producers anxious. Well, there’s another common price scenario that triggers an emotional reaction, and this one might really surprise you.
Published on: 11:41AM Apr 26, 2011
To help illustrate this example, let’s look at hypothetical paths two producers have taken in achieving a final weighted average price for a crop year. Though fictitious, their paths and resulting perceptions are common. As you’ll see, our producers will end up in approximately the same place, yet feel quite different about their actions.
We’ll assume a year in which corn trades in a range from $4.50 on the low end to $6.50 on the high end. Again, this example involves two producers taking different paths to reach nearly the same end result.
· Our first producer sells 50 percent of his crop near the spring high and receives $6.25 a bushel. After harvest, he sells the remaining 50 percent of his bushels at $4.80 before the market bottoms out and stays at $4.50 for the next several months. He realized a $5.52-1/2 weighted average price, 97-1/2 cents behind the high price of the year, yet well above the $4.50 low price. He’s satisfied with this, as are most who find themselves in this situation.
· Our second producer enters the trading range from the opposite end. In this example, the market is coming off its $4.50 low. It rallies to $5.30 by July. Focused on seasonal price patterns and fearing a return to $4.50 by the fall, our second producer sells 70 percent of his crop at $5.30. Next, however, the market rallies to $6.50. With each price move up from $5.30, our producer regrets his 70-percent sale. After the market peaks, he sells the remaining 30 percent of his crop at $6.25.
Our second producer is not so happy. He thinks he missed the rally by selling 70 percent of the crop at $5.30, as do most people in this scenario. They’re frustrated and believe that marketing can’t be done well. In reality, our second producer’s weighted average price is $5.58-1/2, slightly ahead of our first producer’s average.
This is a common emotional reaction to price. When a producer’s first sales are above the finishing market price, he feels good about his decisions. If the market finishes higher than his last sales, he feels bad about his decisions.
Given the high prices we’ve seen since last summer and the extreme likelihood of continued price volatility, inevitably some of you ultimately are going to feel good about the price you receive for your production and others are not. And, there may be no basis for those feelings. For that reason, as always, I encourage you not to focus too closely on any given price. Judge your marketing on the weighted average price for all your acres.
Moreover, try not to get unnecessarily frustrated. Frustration leads to decision-making based on hope and luck. It turns people into inconsistent marketers, which is possibly the most dangerous type of marketer. Successful marketing is about building a solid weighted average price for every bushel grown. In order to position for success, it’s imperative to commit to price opportunity and risk management strategies for the long haul.
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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