New Year And A Fresh Start

I confess that as 2010 came to a close, I felt exhausted. Maybe you did, too. There is nothing easy about grain markets, or the pricing decisions that must be made in a difficult environment. We should be thankful that the new year arrived, and with it a fresh start.

Last year was exhausting because of the familiar lament of a grain marketer in a bull market – “I was too early and too cheap. In hindsight, I could have sold higher-priced corn and soybeans if I had dragged my feet in pricing 2010 crop.”

Ditto for the start of pricing the 2011 crop. Now that our fresh start is here, how should we deal with those too early and too cheap sales?

We may be short grain stocks, but there is no shortage of bulls. Commodity bulls will advise you to re-own earlier sales of corn and soybeans with the purchase of futures contracts or call options. That advice may prove correct, but it is a trader’s approach to marketing. Are you a grain trader or producer?

Concerning pricing decisions made months ago, you have a choice. Will you look backward with re-ownership strategies, trying to correct earlier pricing decisions made on your 2010 and 2011 crops? Or will you look forward to decisions that must be made concerning the rest of your 2011 crop? And while you are looking forward, have you noticed the value of your 2012 corn crop is up over $1/bu. since early summer? Your 2012 soybean crop is up $2/bu. As a grain producer, too early and too cheap is the best of problems, if you choose to look forward.

Look forward. You’re a grain producer and seller, not a grain trader. A fresh start demands that you look forward.

How to adapt your marketing plan

Does the current market make you want to ignore a marketing plan written months ago? Great marketing demands discipline. Don’t abandon your plan – adapt it. Here are a few suggestions on how to adapt your marketing plan.

1. Break your pricing decisions into manysmaller decisions. My plan (shown here) has seven pricing increments. There is no reason that you can’t turn that into 15 separate, but smaller increments.
2. Be willing to follow a trend, defer to decision dates or use options. My plan is purposely vague on pricing tools (tbd or “to be determined”). Rather than hold fast to a price objective and use a forward contract, consider a trend following tool, or deferring to the decision dates in your plan, or buying put options.
3. Be patient.I get nervous when I hear of the rare producer who is taking steps to price 2013 or 2014 crop. Are you that certain of your costs for fertilizer, fuel or rent more than two years out?
4. Tie your input purchase and grain pricing decisions together.The producers in the most difficult position today are not the ones who chose to start pricing 2011 corn last August, when the market was $1 lower. The most difficult position is reserved for those who priced corn early, but refused to lock down lower fuel and fertilizer costs at the same time.

The opposite problem happened in summer 2008 – too many producers chose to lock in high-priced fuel and fertilizer, but waited to lock in a selling price for grain. A bear market ensued and, ouch. Tie these decisions together and you take a big step forward by turning price risk management into margin management.